Financial Institution Directors
The financial marketplace has never provided consumers with as wide an
array of choices as it does today. New investment products are being created
at an unparalleled rate, and the competition among financial services providers
has grown far beyond what many of the strongest proponents envisioned when
Congress began updating the laws governing our financial system nearly two
decades ago.
Without question, these changes have produced tremendous benefits for
our banks, savings institutions and their customers. And, there is little
doubt there will be more changes, more competition and more benefits ahead
of us. Confronting your institutions, however, is an immense challenge.
Put simply, it is how to accommodate your customers' need for a safe, insured
savings depository while also helping them distinguish between insured products
and uninsured investment products.
Since Federal deposit insurance was created more than 60 years ago, we
have grown accustomed to the security of the deposit insurance safety net.
Your customers should continue to rely with confidence on the protection
provided by FDIC deposit insurance. But it is your responsibility to make
it clear to them that this protection has not been extended to the nondeposit
investment products now available from FDIC-insured financial institutions.
This pocket guide was developed to help your managers and line supervisors
structure your nondeposit investment products sales programs so that your
customers can make an informed decision about how best to manage their money.
We have answered some of the questions most frequently asked regarding current
regulatory requirements, and included some key telephone numbers for your
use as the requirements change to reflect the evolution of the marketplace.
We encourage you to call with your questions. Working together, we can make
sure your customers are well-informed about the products they buy. After
all, a well-informed customer is the best consumer.
Sincerely,
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
Washington, D.C.
May 28, 1997
Interagency
Guidelines
Q. What guidance have the Federal banking
agencies issued regarding how financial institutions insured by the Federal
Deposit Insurance Corporation (FDIC) should conduct their uninsured investments
sales programs?
A. In February 1994, the FDIC, the Federal
Reserve Board of Governors, the Comptroller of the Currency and the Office
of Thrift Supervision issued the "Interagency Statement on Retail
Sales of Nondeposit Investment Products." The Interagency Statement
was developed to eliminate customer confusion regarding what is insured
and not insured among the various products available from FDIC-insured depository
institutions. The Interagency Statement emphasizes the need to clearly identify
the differences between traditional insured deposit products and the newer
uninsured products now available at many banks and savings institutions.
The Interagency Statement requires that an institution's board of directors
adopt written policies and procedures and implement general guidelines before
initiating a nondeposit investment product sales program. The Interagency
Statement addresses: (1) how the location of uninsured nondeposit products
sales activities should be distinguished from other retail banking services
within a financial institution; (2) training of nondeposit investment products
sales representatives; (3) how sales representatives should assess the suitability
of uninsured investment products for your customers; (4) compensation arrangements
for bank employees for direct or indirect sales activities; (5) use of depositor
information in nondeposit investment product sales programs; (6) what must
be disclosed about the uninsured investment products you are selling; and
(7) when the required disclosures must be made.
Products
Covered
Q. What is a nondeposit investment product?
A. Any product with an investment component
that is not an insured deposit is subject to the Interagency Statement.
Stocks, bonds, government and municipal securities, mutual funds, annuities
(fixed and variable), life insurance policies (whole and variable), and
savings bonds are nondeposit investment products. Savings bonds are included
because they are not insured. Purchasers of savings bonds must be told they
are not insured, but the rest of the Interagency Statement's provisions
are not applicable. Sweep accounts may or may not be covered by the Interagency
Statement. Applicability depends upon whether the underlying investment
is a deposit.
Retail versus
Institutional and Trust Sales
Q. Are all sales of nondeposit investment
products subject to the Interagency Statement?
A. No. Only retail sales initiated
in an institution's lobby or sales resulting from the institution's referrals
are covered. Recommendations or sales to small businesses, institutional
or corporate accounts are covered only if they are made in the same location
or manner as retail sales to general consumers. Sales through a money desk
or dealer desk are not considered retail sales and, therefore, are not covered.
Trust department sales to fiduciary accounts also are not covered. Hybrid
accounts, such as self-directed IRA accounts and Keogh plans, are subject
to the Interagency Statement if the customer retains investment discretion
and the underlying investment is a nondeposit investment product.
Location
Q. May nondeposit investment products be
sold in an insured financial institution's lobby?
A. Yes. The guidelines state that sales of
nondeposit investment products can take place in an institution's lobby
as long as the sales area is "physically distinct" from the deposit-taking
area. Problems arise because retail customers perceive that all financial
instruments available at the teller window or in the lobby are insured.
Therefore, it is critical that the customer be able to distinguish between
the area where insured deposit business is conducted and the area where
uninsured investment products are sold. Signs, dividers, plants or other
techniques can and should be used to make the sales area "physically
distinct." Although not required, many financial institutions use separate
offices for nondeposit investment product sales.
Q. Does the Interagency Statement prohibit
the recommendation and sale of nondeposit investment products from shopping
mall or supermarket kiosks where space is so limited that the sales area
cannot be made "physically distinct" from the deposit-taking area?
A. No. However, where physical limitations
prevent the establishment of distinct areas, depository institutions have
a heightened responsibility to ensure that customers understand that the
nondeposit investment products are not insured. Kiosk employees also must
be appropriately trained before they recommend or sell nondeposit investment
products.
Q. Does the Interagency Statement also apply
to recommendations and sales that take place outside of an institution's
lobby?
A. Yes. The Interagency Statement applies
to all retail sales activities wherever they occur. Telemarketing campaigns,
Internet web sites, mass mailings and any other method used must comply
with the guidelines. The Interagency Statement also applies to referrals
by an institution to an off-site vendor if the institution receives compensation
for the referral. An institution's subsidiaries or affiliates are considered
vendors subject to the requirements of the Interagency Statement.
Q. May nondeposit investment products be
sold through a trust department?
A. Yes and no. Trust departments recommend,
buy and sell nondeposit investment products for trust customers. The Interagency
Statement does not cover recommendations and sales of nondeposit investment
products to "fiduciary accounts." Trust departments cannot, however,
make retail sales of nondeposit investment products. Retail sales are not
trust department activities, and institutions should not direct retail customers
to the trust department for nondeposit investment product sales.
Program Structure
Q. May insured institutions use their own
employees to sell nondeposit investment products, or must they use registered
representatives of broker/dealers or insurance agents?
A. An insured institution can do either.
In the three typical program structures, an institution uses: (1) its own
employees; (2) "networking" arrangements with vendors such as
broker/dealers or insurance agencies who use their own employees; or (3)
a "dual employee" arrangement, which is a type of networking arrangement
involving use of both a vendor and the institution's employees. The networking
arrangement is the most widely used program structure.
Q. Who is responsible for an insured institution's
employees who act as "dual employees" for vendors offering nondeposit
investment products?
A. While the contract with the vendor should
set forth the rights and obligations of all parties, a vendor is typically
responsible for supervising dual employees who recommend and sell nondeposit
investment products. The Interagency Statement recognizes that "dual
employee" arrangements are common and requires that there be written
employment contracts for such employees.
Q. Does the Interagency Statement apply to
sales by vendors operating under a networking arrangement? What about an
institution's subsidiaries and affiliates?
A. Even though vendors such as broker/dealers
and insurance agents are primarily subject to other Federal or state agencies
and the rules they establish, the Interagency Statement requires insured
institutions entering into "networking" or "dual employee"
arrangements to have as part of their contract a requirement that the vendor
comply with all applicable laws and regulations, including the Interagency
Statement. An institution's subsidiaries and affiliates are vendors subject
to the requirements of the Interagency Statement.
Q. Do the guidelines apply to retail sales
programs that are limited to referrals to a registered broker/dealer's toll-free
telephone number?
A. Yes, but only if the financial institution
receives compensation--cash or services--from the broker/dealer in exchange
for referrals of its customers.
Q. What other provisions are required in
contractual agreements with vendors who recommend and sell nondeposit products
on and off the institution's premises?
A. The Interagency Statement requires that
written agreements be executed with vendors and that such agreements should
be reviewed and approved by an institution's board of directors. These written
agreements must: (1) include a description of duties and responsibilities
of both the institution and the vendor; (2) require vendor compliance with
all applicable laws and with the Interagency Statement; (3) provide for
vendor indemnification of the depository institution for any actions or
costs arising out of the nondeposit investment product program; (4) provide
for access to the vendor's records by the institution and by the appropriate
Federal banking agency; (5) include terms defining the use of the institution's
space, personnel and equipment; (6) describe compensation arrangements for
institution and vendor personnel; and (7) include employment contracts for
dual employees.
Sales by
an Institution's Employees
Q. Are there restrictions on which employees
can be used to sell nondeposit investment products directly?
A. Any employee who receives appropriate
training is eligible to recommend or sell nondeposit investment products.
The Interagency Statement attempts to eliminate customer confusion regarding
the uninsured status of nondeposit investment products by restricting where
nondeposit investment products can be recommended and sold. Employees who
receive deposits, cash checks or open new accounts--such as tellers located
behind the deposit counter (kiosk arrangements excepted) or officers at
new account desks--are not permitted to recommend or sell nondeposit investment
products from these types of locations. However, these same employees would
be permitted to recommend or sell such products if they are positioned at
a location "physically distinct" from the deposit counter or the
new accounts desk.
Q. What type of training is required for
employees who recommend and sell nondeposit investment products?
A. The type of training and supervision required
depends on the products an employee will sell. Those employees who recommend
and sell only mutual funds should have training comparable to what a broker/dealer's
registered representative obtains prior to taking and passing the Series
6 examination administered by the National Association of Securities Dealers
(NASD). Employees who also sell stocks and bonds should have training commensurate
with that of a registered representative who has taken and passed the Series
7 examination. In December 1996, the Federal banking agencies proposed regulations
that, if adopted, will require that employees of financial institutions
meet qualification requirements similar to those used in the securities
industry if they are going to recommend or sell mutual funds, stocks or
bonds. If employees sell insurance products, they should have the type of
training insurance agents receive and obtain the appropriate licenses.
Customer
Information
Q. May an insured institution provide information
on its customers to a vendor offering nondeposit investment products?
A. Financial institutions must establish
written policies regarding the use and release of customer information to
vendors. Each institution should review applicable state laws regarding
use and ownership of customer records and customer privacy rights prior
to establishing written policies and procedures in this area.
Required
Disclosures
Q. What disclosures does the Interagency
Statement require insured institutions to make to customers who are interested
in purchasing nondeposit investment products?
A. The Federal banking agencies decided that
one of the best ways to eliminate customer confusion was to require that
the following three disclosures be made: (1) nondeposit investment products
are not insured by the FDIC; (2) nondeposit investment products are not
obligations of, or guaranteed by, the financial institution; and (3) nondeposit
investments will subject the purchaser to investment risk, including possible
loss of the principal amount invested.
Q. When must a sales representative make
the required disclosures?
A. There are several points at which a sales
representative must provide the required disclosures. They are when: (1)
a sales presentation is given; (2) an account is opened; and (3) a sale
of a nondeposit investment product is made.
Q. What may a teller or receptionist tell
a customer about the institution's nondeposit investment product sales program?
A. Tellers and receptionists are permitted
to "direct" customers to sales representatives, but should not
open accounts, qualify customers or take orders for nondeposit investment
products. A teller or receptionist would not be required to make the mandatory
disclosures if he or she is simply directing the customer to the appropriate
sales representative. The required disclosures are triggered when a sales
presentation occurs.
Q. When does a sales presentation begin?
A. A sales presentation begins when a sales
representative starts to discuss particular attributes of specific nondeposit
investment products. Statements such as "We have mutual funds, annuities,
life insurance, stocks and bonds available at the desk over there"
or "Acme mutual funds and Xtra Life annuities are available through
the investment center" are not considered sales presentations because
they are "directional" in nature and do not involve a discussion
of the particular attributes of a specific nondeposit investment product.
Q. Do sales representatives have to make
the required disclosures in telephone solicitations?
A. Yes. The required disclosures must be
made in telephone solicitations and other forms of telemarketing. The disclosures
must be given when a sales presentation begins, even if the recommendation
or sale is being made over the telephone.
Q. Is a sales representative required to
obtain a written acknowledgment from customers documenting that they have
received the required disclosures?
A. Yes. A statement, signed by the customer,
should be obtained when an account is opened acknowledging that the customer
has received and understands the disclosures. If an institution's sales
are made through a vendor, the vendor should obtain the signed acknowledgments.
Q. Do financial institutions have to make
the required disclosures on account statements and confirmations?
A. Yes. The Interagency Statement requires
nondeposit investment product account statements and confirmations to have,
at a minimum, the three mandatory disclosures. This requirement also applies
to account statements that show both deposit and nondeposit investment product
balances. The Federal banking agencies have approved the disclosure logo
shown below.
Referral
Fees
Q. May an institution pay its employees referral
fees?
A. Yes. Financial institutions are permitted
to pay their employees a one-time, nominal referral fee. The fee must not
be contingent on a transaction taking place. The Interagency Statement does
not prohibit vendors from paying referral fees to a financial institution's
employees. However, the NASD has indicated that it would be impermissible
for NASD member broker/dealers to make such payments.
Suitability
Q. Is it the responsibility of an insured
institution's management to monitor whether its vendor or the institution's
direct sales representatives have evaluated the suitability of nondeposit
investment products being recommended or sold to customers?
A. Yes. A financial institution engaged in
direct sales should have reasonable grounds for believing that the specific
nondeposit investment product recommended by its employee is suitable for
the potential purchaser. Before a sales representative makes any recommendations,
information must be obtained from the customer regarding financial status,
tax status, investment objectives, risk tolerance and such other information
that may be useful or reasonable in making investment recommendations. An
institution's management is responsible for making sure that in all forms
of networking arrangements its vendors have adequate systems and procedures
in place for conducting this "suitability" analysis.
Supervision
of Third-Party Sales Programs
Q. What type of oversight must management
exercise over vendors operating on a financial institution's premises or
off-site location?
A. An institution's management is responsible
for overseeing its vendors regardless of whether they are operating on or
off-site. Typical oversight would include reviewing: (1) the types and volume
of products being sold; (2) the number of opened and closed accounts; (3)
new products being offered; (4) discontinued products; and (5) customer
complaints and their resolution.
Q. What is an institution's management expected
to do in the area of customer complaints?
A. An institution's management is expected
to be aware of and investigate all customer complaints, and document how
such complaints are being resolved. This applies to both direct sales programs
and networking arrangements administered by vendors. A financial institution's
management should frequently review customer complaints with the institution's
vendor to determine what changes or additional training is necessary to
avoid future problems.
Q. What should an institution do if it becomes
aware of problems with a specific registered representative who is an employee
of the institution's vendor?
A. A financial institution is responsible
for making sure that the vendor is supervising its employees adequately.
Financial institutions should receive periodic reports from their vendors
describing the number and seriousness of complaints and how they are resolved.
The financial institution should discuss serious or frequent complaints
concerning a specific sales representative with its vendor. If warranted,
the institution should consider requesting that the registered representative
be replaced. If the vendor does not take appropriate action, the financial
institution should alert the FDIC or appropriate Federal banking regulator
and consider referring the problem to the NASD or the Securities & Exchange
Commission (SEC).
Additional
Information
If you have questions regarding nondeposit investment products or the
Interagency Statement, or if you would like a copy of the Interagency Statement,
please contact:
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
(877) 275-3342 or (877) ASK-FDIC
For the hearing impaired call 1 (800) 925-4618 or 1 (703) 562-2289 in the
Washington,
D.C. area
http://www2.fdic.gov/starsmail/index.asp
Board of Governors of the Federal Reserve
System
20th & C Streets, N.W.
Washington, D.C. 20551
202-452-3693
http://www.federalreserve.gov
Office of the Comptroller of the Currency
Customer Assistance Group,
1301 McKinney Street, Suite 3450
Houston, TX 77010
1-800-613-6743
http://www.helpwithmybank.gov/
Office of Thrift Supervision
Department of the Treasury
1700 G Street, N.W.
Washington, D.C. 20552
202-906-6237
http://www.ots.treas.gov/
Other information about investment products and securities
sales practices is available by contacting:
The Financial Industry Regulatory Authority
(formerly The National Association
of Securities
Dealers)
1-800-289-9999
http://www.finra.org
The Securities and Exchange Commission
Office of Investor Education and Assistance
450 5th Street, N.W.
Mail Stop 11-2
Washington, D.C. 20549
202-942-7040
1-800-732-0330
http://www.sec.gov
