retail nondeposit investment sales

Retail Nondeposit Investment SalesIntroduction Section 413.1

Comptroller's Handbook for National Bank ExaminersTemporary Insert ) February 1994 1

This section sets forth guidance forexaminers reviewing bank nondepositinvestment product retai l salesoperations, including bank-relatedmarketing and promotional activities.Examiners will review a bank's programsfor consistency with the InteragencyStatement on Retail Sales of NondepositInvestment Products, dated February 15,1994 (Interagency Statement). Theevaluation will cover all bank-relatedactivities including:

! Sales or recommendations made bybank employees;

! Sales or recommendations made byemployees of affi l iated orunaffiliated entities occurring onbank premises (including sales orrecommendations initiated bytelephone or by mail from bankpremises); and

! Sales resulting from referrals ofretail customers to a third partywhen the bank receives a benefitfor the referral.

When reviewing a bank's nondeposit in-vestment sales operation, examinersshould determine that the bank viewscustomers' interests as critical to allaspects of its sales programs. Examinersshould evaluate a bank's policies andprocedures from the customers'perspective and should ascertain thatcustomers are provided with a high levelof protection. If it becomes necessary torecommend remedial action, examinersshould determine that bank managementresponds immediately to any matter thathas the potential to confuse customers asto the uninsured nature of nondepositinvestment products.

Banks that do not operate programssafely and soundly or that engage inviolations of law or regulations will besubject to appropriate regulatory action.When determining the appropriate action,examiners should be mindful that somebanks, especially banks relying on third

parties for sales of nondeposit investmentproducts, may need time to conform theirprograms to the Interagency Statementand to the guidance contained herein. Ata minimum, however, examiners shoulddetermine whether bank management ismaking a good faith effort to complywith this regulatory guidance in a timelymanner.

This section applies to sales to individualcustomers but does not apply to thewholesale sale of nondeposit investmentproducts to non-retail customers, such assales to institutional customers or tofiduciary accounts administered by aninstitution. As part of its generalresponsibilities, however, a national bankshould take appropriate steps to avoidpotential customer confusion whenprovid ing nondeposit investmentproducts to institutional customers or tothe bank's fiduciary customers. For addi-tional information on restrictions on anational bank's use as fiduciary of thebank's brokerage service or other entitywith which the bank has a conflict ofinterest, including purchases of thebank's proprietary and other products,see 12 CFR 9.12 and "Sales to FiduciaryAccounts," later in this section.

ScopeExaminer reviews of a bank's mutual fundor other nondeposit investment sales pro-gram will concentrate on the policies andprocedures the bank adopts and on theeffectiveness of their implementation.

When reviewing implementation of abank's program, examiners wil linvestigate whether senior bankmanagement has:(1) Participated in planning the bank's

investment sales program;(2) Adopted a framework to ensure

compliance with all applicablelaws, rules, regulations, regulatoryconditions, and the InteragencyStatement; and



(3) Ensured effective supervision ofindividuals engaged in sales activi-ties, including employees of thebank and any other entity involvedin bank-related sales of investmentproducts.

Where relevant, references in this hand-book section to bank management orbank employees includes third partymanagers or third party employees.

Minimum Standards for NondepositInvestment ProgramsAntifraud provisions of the federal securi-ties laws prohibit materially misleading orinaccurate representation in connectionwith offers and sales of securities. (See,for example, Section 10 of the SecuritiesExchange Act of 1934 and Rule 10b-5.)If customers are misled about the natureof nondeposit investment products,including their uninsured status, sellerscould face potential liability under theseantifraud provisions. Safe and soundbanking also requires that bank-relatedretail sales activities be operated to avoidconfusing customers about the productsbeing offered. Use of nonbankemployees to sell these products doesnot relieve bank management of theresponsibility to take reasonable steps toensure that the investment sales activitiesmeet these requirements.

The Rules of Fair Practice of the NationalAssociation of Securities Dealers (NASD)expressly govern sales of securities bybroker/dealers who are members ofNASD. These rules apply to bank-relatedsecurities sales by banking subsidiariesregistered as broker/dealers, affiliatedbroker /dea le rs , and unaf f i l i a tedb roke r /dea l e r s ope ra t i ng unde ragreements with banks. These rulesapply whether such sales are made onbank premises or at a separate location.

These rules do not expressly apply to

sales or recommendations made directlyby the bank. Even when these rules donot expressly apply, however, they are anappropriate reference for a bankcompliance program designed to ensurethat the bank's retail sales of allnondeposit investment products areoperated in a safe and sound manner.

Before beginning to operate a nondepositinvestment sales program, banks may alsoconsider notifying their blanket bondcarriers of plans to engage in theseactivities. If applicable, this could permitthe bank to obtain written assurancesfrom the carrier that the bank's insurancecoverage for employees includes staffrepresenting third party vendors.

Examiners also should encourage bankmanagement to review Retail InvestmentSales: Guidelines for Banks. The publica-tion, prepared jointly by six bankingindustry trade associations, containsvoluntary guidelines for bank sales ofnondeposit investment products as wellas common sense suggestions for puttingmany of the OCC's recommendationsinto action.

Program ManagementBanks must comply with all applicablelaws, rules, regulations, and regulatoryconditions, and operate consistently withthe Interagency Statement for any oftheir bank-related retail sales of mutualfunds, annuities, or other retailnondeposit investment products. Bankdirectors are responsible for evaluatingthe risks imposed by bank-related salesand are expected to adopt a programstatement and self-regulatory policies andprocedures to ensure compliance with allrequirements. A bank's policies andprocedures must address bank-relatedretail sales made directly by a bank,through an operating subsidiary oraffiliate, or by an unaffiliated entity.

Examiners should expect that banks will



tailor their policies and procedures to thescope of the bank's sales activities. Thelevel of detail contained in a bank'spolicies and procedures will depend onthe structure and complexity of thebank's program.

Examiners will review the bank'ssecurities sales activities to determinethat the bank has adopted a statementthat addresses the risks associated withthe sales program and describes thefeatures of the sales program, the roles ofbank employees, and the roles of thirdparty entities. The statement should setforth the strategies the bank will employto achieve its objectives. It also shouldoutline the self-regulatory proceduresbank management will implement toensure that the program's objectives aremet without compromis ing thecustomers' best interests.

At a minimum, examiners should expectbank policies and procedures to address:

Supervision of personnel involved innondeposit investment sales programs ))Senior bank managers will be expected toensure that specific individuals employedby the bank, an affiliated broker/dealer,or a third party vendor are responsible foreach activity outlined in the bank'spolicies and procedures. Managers of thebank's securities sales activities will beaccountable for understanding the invest-ment products offered and the sales pro-cess, as well as for assuring compliancewith securities and banking laws, rules,and regulations.

Designation of employees authorized tosell investment products )) This shouldserve as a guide for all bank-related em-ployees dealing with retail nondepositinvestment product customers. Theprogram statement should specify thatonly properly trained and supervised em-ployees are permitted to make investmentsales or recommendations. It should

describe the responsibilities of personnelauthorized to sell or recommendnondeposit investment products and ofother personnel who may have contactwith retail customers concerning thesales program. It also should include adescription of appropriate and inappropri-ate referral activities and the trainingrequirements and compensation ar-rangements for each category of per-sonnel.

The roles of other entities selling on bankpremises, including supervision of sellingemployees )) Bank management must planto monitor compliance by other entitieson an ongoing basis. The degree of bankmanagement's involvement should bedictated by the nature and extent ofnondeposit investment product sales, theeffectiveness of customer protection sys-tems, and customer responses. (See"Third Party Vendors," later in thissection for more details on programsoperated by third parties.)

The types of products sold )) Policies andprocedures should include the criteria thebank will use to select and review eachtype of product sold or recommended.

For each type of product sold by bankemployees, the bank should identifyspecific laws, regulations, regulatoryconditions, and any other limitation orrequirements, including qualitative con-siderations, that will expressly govern theselection and marketing of products thebank will offer. (See "ProductSelection," later in this section for furtherdiscussion of these issues.)

Examiners should review:! The process the bank uses to select

the products it will offer,! What the bank did to ensure the

products meet its customers' needsand expectations, and

! How well the bank is performingan ongoing analysis of the



appropriateness of the productsoffered for sale.

Examiners will also assess the indepen-dence and thoroughness of the analysisand the degree to which the bank relieson ratings services. Examiners should becritical of bank managers who simplychoose products that generate the largestsales fees or accept what a third partyhas to offer without performing an inde-pendent analysis of the suitability of theproducts to the bank's strategy andcustomer mix.

Examiners should not give the impressionthat the agency expects bank managersto be "stock pickers" or that it intends toexpand or limit the types of productsbanks offer. Instead, examiners shoulddetermine that bankers are selectingproducts that generally meet theircustomers' needs.

(See "Third Party Vendors," later in thissection, for more details on the bank'soversight roles when it relies on its thirdparty vendor to select products.)

Policies governing the permissible uses ofbank customer information )) Examinersshould determine that bank customerinformation policies address the permissi-ble uses of such information for any pur-pose associated with bank-related retailinvestment sales activity. In particular, ifthe bank intends to use customer lists totelephone depositors whose certificatesof deposit are due to mature to informthem about alternative investmentproducts, the policies should outlinesteps the bank will take to avoidconfusing customers as to the risksassociated with nondeposit investmentproducts, including their uninsurednature.

Banks may also supply customer informa-tion lists to a third party vendor.Supplying such information should only

occur, however, after bank managementhas evaluated steps the third party istaking to avoid confusing customers andafter determining such steps areconsistent with bank policy.

Bank management also may wish to con-sider obtaining a legal opinion concerningthe bank's authority to share customerinformation with third parties.

Communications with customers )) Exam-iners should determine whether thebank's policies consider the need forperiodic and ongoing communicationswith customers to help them understandtheir investments and to remindcustomers periodically that the productsthey have purchased are not insureddeposits. Policies should outlinecustomer communications for the bankduring periods of market stress andassign responsibi l i t ies for suchcommunications.

Setting and Circumstances ofNondeposit Investment ProductSalesBanks should market nondeposit productsin a manner that does not mislead or con-fuse customers as to the nature of theproducts or their risks. The setting andcircumstances surrounding sales ofinvestment products is fundamental toensuring that customers can readilyd is t ingu ish between nondepos i tinvestment products and insureddeposits. Examiners will determine thatbank management has establishedcontrols to distinguish retail deposit-taking activities from the promotion, sale,and subsequent customer relationshipsrelated to retail nondeposit investmentsales.

To minimize customer confusion, salesof, or recommendations for, nondepositinvestment products on the bank'spremises should be conducted in a



physical location distinct from the areawhere retail deposits are taken. Signs orother means should be used todistinguish the investment sales areafrom the retail deposit-taking area of theinstitution.

In the limited situation in which physicalconsiderations prevent nondeposit invest-ment product operations from being con-ducted in a distinct area of the bank, abank has a heightened responsibility toensure that measures are in place to mini-mize customer confusion. To minimizecustomer confusion, the bank shouldmake an officer responsible for each ofthe locations at which the investmentproduct sales will take place.

The bank also should employ signs and,where possible, separate desks andpersonnel for deposit-taking and in-vestment product sales. Investmentproduct salespeople should clearlyidentify themselves by the use ofappropriate methods such as name tagsor separate business cards. In bankswhere the investment program is likely tobe less elaborate, the examiner shoulddetermine, at a minimum, that the bankutilizes the written and oral disclosuresdescribed below.

In no case should any employee, whilelocated in the routine deposit-taking area,such as the teller window, make generalor specific investment recommendationsregarding nondeposit investmentproducts, or accept orders for suchproducts, even if unsolicited. Tellers andother employees who are not authorizedto sell nondeposit investment productsmay only refer customers to individualswho are specifically designated andtrained to assist customers interested inthe purchase of such products.

Product names )) Banks may not offernondeposit investment products with aproduct name identical to the bank's

name. Names that imply that mutualfunds are U.S. government guaranteedalso are prohibited.

Banks also should recognize that thepotential for customer confusion may beincreased if the bank offers nondepositproduct names that are similar to thebank's name. If the bank offers suchnondeposit products with names similarto the bank's, it should design salestraining programs to minimize the risk ofconfusing customers.

In addition, Securities and ExchangeCommission (SEC) staff have issued anopinion that common names between abank and a mutual fund sold or marketedby or through that bank are presumed tobe misleading and a violation of theInvestment Company Act of 1940. SECstaff contends, however, that a commonname fund can rebut the presumptionthat a fund's name is misleading byensuring that the cover page of theprospectus prominently discloses that thefund's shares are not deposits or obliga-tions of the bank and are not federallyinsured.

When examining investment sales pro-grams in a bank that is selling funds withnames similar to the bank's, examinerswill evaluate the steps that bankmanagement has taken to avoidconfusing customers. The greater thesimilarity between bank and fund names,the more closely examiners will scrutinizeall aspects of a bank's sales program.

Examiners should criticize sales programsin which fund names are so similar to theb a n k ' s t h a t e v e n m i t i g a t i n gcircumstances are unlikely to eliminatecustomer confusion. For example, it maybe acceptable for "First National Bank" tooffer a nondeposit investment productnamed "First Fund" as long as the bankhas implemented sufficient disclosures,training, and other measures to mitigate



customer confusion. Other names,however, such as "First Bank Fund" or"First National Fund" are so similar to abank's name that they are inappropriatebecause they are inherently confusing.

Examiners and bank management shouldalso be aware that the potential for cus-tomer confusion can depend on thecontext in which the sales are takingplace. For example, it may beinappropriate for the First National Bankto offer a mutual fund product named"FNB Money Market Fund" if FirstNational Bank were also offering aninsured deposit product named "FNBMoney Market Account."

Overall setting and circumstances )) Whenreviewing nondeposit investment productsales operations, examiners should notplace undue weight on a single aspect ofthe setting and circumstances of the sale.Each bank's sales program is different,and one set of rules may not cover allcircumstances or provide all customerswith the necessary level of protection.Before judging a particular bank's opera-tions, examiners should consider how thevarious elements of the program interactand whether the elements combined mis-lead or avoid misleading customers.

The following example illustrates how thecombination of certain elements canpotentially mislead customers:

An employee of the First NationalBank sits at a desk in the lobby. Thisemployee sells money market mutualfunds and renews CDs. The employeetells customers about two productsthe bank is offering: the FNB MoneyMarket Fund, an uninsured retailnondeposit investment product, andthe FNB Money Market Account, aninsured deposit. This employee mayhave an incentive to market theuninsured product because theemployee gets a commission forselling a mutual fund but receives

nothing for selling or renewing a de-posit.

This situation could confuse customers.To mitigate customer confusion, the bankshould ensure that the employee hasextensive knowledge of the productsbeing sold and that the employee is thor-oughly aware of customer protection is-sues. When selling noninsured products,the employee should also require custom-ers to sign a new account form acknowl-edging that the product is not insured.

If space and personnel limitations appearto increase the potential for customerconfusion, examiners should encouragebank management to require additionaltraining and disclosures, to develop signsand product names that clearlydistinguish among the products beingsold, and to assure that compensation forselling uninsured and insured products isequalized. Examiners should expectbanks with nondeposit investment salesprograms already in operation when thissection is issued to initiate actionsimmediately to conform all aspects of thesetting and circumstances of the bank'sprogram to these requirements. Inparticular, banks should take immediatesteps to correct any elements that couldconfuse customers.

Disclosures and Advertising

DisclosuresComplete and accurate disclosure mustbe provided to avoid customer confusionas to whether a bank-related product isan investment product or an insured bankdeposit. Examiners should determinethat banks selling, advertising, orotherwise market ing nondepos i tinvestment products to retail customersprovide the following product disclosuresconspicuously: The products offered (1)are not FDIC insured, (2) are not depositsor other obligations of the bank or



guaranteed by the bank, and (3) involveinvestment risks, including possible lossof principal amount invested.

The minimum disclosures should beprovided to the customer:

! Oral ly dur ing any sa lespresentation.

! Orally when investment advice con-cerning nondeposit investmentproducts is provided.

! Orally and in writing prior to or atthe time an investment account isopened to purchase theseproducts.

! In advertisements and other promo-tional materials, as describedbelow.

Examiners will determine whether thesedisclosures are featured conspicuously inall written or oral sales presentations,advertising and promotional materials,prospectuses, confirmations, and periodicstatements that include the name or thelogo of the bank or an affiliate.

Advertisements and brochures alsoshould feature these disclosures at leastas large as the text describing the bank'snondeposit investment products. TheOCC believes that these disclosures areconspicuous when they appear on thecover of a brochure or on the first part ofrelevant written text. A bank'sdisclosures could also be consideredconspicuous if it prints the requireddisclosures in a box or by displaying themin bold type or with bullet points.

The bank should obtain a signeds ta temen t acknow ledg ing suchdisclosures from customers at the time aretail nondeposit investment account isopened. For accounts established beforeissuance of this section, the bank shouldconsider obtaining such a signedstatement prior to the next sale. If thebank solicits customers by telephone ormail, it should be assured that customers

agreeing to purchase nondepositinvestment products receive thedisclosure acknowledgement form whenthey open a new account. A bank shouldalso request all customers who previouslyopened investment accounts by mailwithout receiving these written disclo-sures to sign and return a disclosure ac-knowledgement to the bank.

Confirmations and account statementsfor nondeposit investment productsshould contain at least the minimumdisclosures if the confirmation or accountstatement contains the name or logo ofthe bank or its affiliate. If a customer'speriodic deposit account statementincludes account information aboutnondeposit investment products, thebank should clearly separate that informa-tion from information about the depositaccount. The material on the customer'speriodic deposit account relating to non-deposit investment products also shouldbegin with the disclosures describedabove as well as the identity of the entityconducting the nondeposit transaction.

Where applicable, examiners shoulddetermine that the bank has madeadditional disclosures described in theInteragency Statement regarding affiliaterelationships and specific fees andpenalties.

Some disclosure obligations may arisefrom the roles a bank or a bank affiliatemay p lay in the d ist r ibut ion,administration, and/or managementprocesses. For example, a bank shoulddisclose remuneration received forperforming investment advisory servicesand administrative services such asshareholder accounting. This disclosureobligation may be met through feedisclosures in a prospectus. If theprospectus does not include such fee dis-closures, the bank must make the disclo-sures by some other means. State lawrequirements may also govern fee disclo-



sures.

Additional disclosure responsibilities mayoccur because of the manner in whichnondeposit investment products are mar-keted. Examiners should determinewhether public statements about theselection of the products a bank offersare reasonable. As an example, ifmanagement represents to customersthat it has performed an independentanalysis of the product selected, theexaminer should determine that the bankhas actually done so. Examiners will alsoevaluate management's disclosure toprospective customers of ratingsapplicable to a particular product,including the source of the rating. Ifratings are used to promote certainproducts, examiners should expect bankmanagement to review whether the bankwill disclose ratings changes and, if so,determine how such disclosures willoccur.

Examiners should also determine whethera bank-related sales program includes anywritten or oral representations to custom-ers concerning insurance coverageprovided by any other entity apart fromFDIC, e.g., the Securities InvestorProtection Corporation (SIPC), a stateinsurance fund, or an insurance company.If these types of representations aremade, examiners should determinewhether training concerning differencesin insurance coverage is provided toappropriate personnel. Appropriatepersonnel includes anyone who is likelyto respond to customer inquiries orindividuals designated to sell such prod-ucts. Examiners should also determine ifwritten or oral explanations of the differ-ences in coverage are provided to all cus-tomers.

AdvertisingExaminers should assess the proceduresthe bank uses to ensure that bank-relatedsales advertisements are accurate, do not

mislead customers about the nature ofthe product, and include requireddisclosures. For example, claims about"no fees" or "no charges" are notaccurate if the selling bank collects feesfor investment advisory services orcollects fees for shareholder accountingon the product or service beingadvertised. In this case a bank couldclaim that there are no "sales" chargesand inform readers that a description ofother charges is contained in theprospectus.

Examiners should determine that thebank does not imply in advertising or inwritten and oral presentations that thebank stands behind an investmentproduct.

The bank's marketing department shouldnot be solely responsible for bank-relatedinvestment sales advertisements. Theissuer, or, if a mutual fund, thedistributer, may prepare advertisementsof specific investment products thatconform to standards developed by self-regulatory organizations such as NASD.Senior bank management should appointan officer responsible for ensuring thatbank investment advertisements as wellas advertisements prepared by anotherparty that make reference to the bank, orany advertisement used in bank-relatedsales, are accurate, not misleading, andinclude all required disclosures.

SuitabilityConsistent with the Rules of FairPractice, the OCC expects banks todetermine whether a product beingrecommended is an appropriateinvestment for the customer. Banksshould ensure that any salespeopleinvolved in bank-related sales obtainsufficient information from customers toenable the salesperson to make ajudgment about the suitability ofrecommendat ions fo r pa r t i cu la rcustomers. At a minimum, suitability



inquiries should be made consistent withthe Rules of Fair Practice concerning thecustomer's financial and tax status,investment objectives, and other factorsthat may be relevant, prior to makingrecommendations to the customer. Thisinformation should be documented andupdated periodically.

A well-documented suitability inquiry canprotect a bank from dissatisfiedcustomers who threaten litigation. Suchlitigation could introduce risk to thebank's capital. Accordingly, the OCCmay view banks operating a retailsecurities business without appropriatesuitability procedures to be engaging inan unsafe and unsound practice.

Many banks use software programs thatdocument investor profiles to assist inmaking suitability judgments. Eachprofile is based on a customer'sresponses to inquiries as to his or herfinancial and relevant personal history.The software program subsequentlymatches the customer's investment needsand objectives to the bank's availableproducts. This type of software is atool, not a substitute for professionaljudgement; it should not weight bankproprietary products too heavily or bankdeposits too lightly.

One example of a critical suitability deter-mination involves sales to elderly bankcustomers. Many of these customers relyupon investments or savings for retire-ment income and may consequently de-mand high yields. They may not,however, have the ability to absorb orrecover losses. A nondeposit investmentsalesperson should also be aware that itis especially important to make a carefulsuitability recommendation when dealingwith a surviving spouse who is notexperienced in investment matters.

Examiners should investigate potentialsuitability problems in mutual fund sales

when reviewing "breakpoints" and"letters of intent." Breakpoints arediscounts that are available to investorswho purchase a large amount of mutualfund shares in a lump sum or as part of acumulative investment program (e.g.under a "letter of intent"). The potentialfor abuse usually occurs when the sale ofseveral different mutual fund shares takesplace in quantities just below the level atwhich the purchaser would qualify forreduced sales charges on any one of thefunds.

Examiners should determine whether abank officer has been assignedresponsibility for implementing and/ormonitoring the suitability system. Theexamination approach should focus onthe system the bank has in place to makesu i t ab i l i t y i nqu i r i e s , su i t ab i l i t yjudgements, and periodic accountreviews. Examiners generally shouldreview sales patterns rather thanindividual sales for suitability issues. Todetermine the types of sales to test forsuitability, examiners should investigatemarketing programs that target a class ofcustomers, customer complaints, sales tofirst-time and risk-averse investors, salesmade by high- or low-volumesalespersons, volatile and new products,and the existence of mutual fundredemptions after relatively short holdingperiods.

Qualifications and TrainingBanks should implement detailed trainingprograms to ensure that sales personnelhave thorough product knowledge (asopposed to simple sales training for aproduct) and understand customerprotection requirements. Examinersshould assess the process the bank usesto ensure that sales personnel areproperly qualified and adequately trainedto sell all bank-related nondepositinvestment products. If bank personnelsell or recommend securities, the trainingshould be substantively equivalent to



that required for personnel qualified tos e l l s e c u r i t i e s a s r e g i s t e r e drepresentatives. Securities industry train-ing is available in most metropolitanareas.

Examiners also should determine that thebank's audit and compliance personneland pe rsons w i th supe rv i so ryresponsibilities are properly trained andknowledgeable.

A bank's hiring practices and trainingplan should be designed around thecomplexity and risks of the particularinvestment products being offered.While it may be appropriate to have abanking generalist with no securitiesindustry background sell money marketmutual funds, it could be inappropriate toallow this individual to sell fixed-rateannuities without extensive training.

If individuals with securities industryexperience are hired to sell investmentproducts for banks, they should have anunderstanding of securities industrycustomer protection and control systemsand have an adequate knowledge of theproducts being offered. Since they maynot be familiar with general bankingregulations and may not understand theneeds of bank customers, banks shouldalso ensure that these individuals areinstructed as to the specializedobligations of selling investment productsin a retail banking environment. Ex-aminers should expect management tocheck with securities regulators to deter-mine if potential bank sales employeeswith previous securities industryexperience have a disciplinary history.

Banks engaging in lower volume mutualfund and annuity sales frequently trainexisting bank employees to sellinvestment products. Examiners shoulddetermine that bank management issatisfied that these individuals haveacquired "product knowledge," and

thoroughly understand the need tosafeguard the customers' interests. Morespecialized "product knowledge" trainingis generally provided by the marketingdivision of a mutual fund sponsor oranother third party vendor. Bank staffshould also receive customer protectionand compliance training.

Examiners should determine whether abank officer has been assignedresponsibility for ensuring that adequatetraining is provided to bank staff, and forreviewing the hiring and trainingpractices of a third party vendor.

CompensationIncentive compensation systems, whichare standard in the securities andinsurance businesses, are becomingincreasingly common in commercialbanking. Personnel who are authorizedto sell nondeposit investment productsmay receive incentive compensation,such as commissions, for transactionsentered into by customers. However,incentive compensation programs mustnot be structured in such a way as toresult in unsuitable recommendations orsales being made to customers.

An improperly designed compensationsystem can provide a bank employee withthe incentive to place his or her owncompensation interests above theinterests of bank customers. Examinersshould assess the steps management hastaken to ensure that compensation pro-grams do not operate as an incentive forsalespeople to make unsuitablerecommendations or sales to customers.

One way to avoid having thecompensation system drive therecommendation toward mutual fundsand away from certificate of depositrenewals would be to separate thenondeposit investment product sales andCD renewal functions. Alternatively, if



employees are permitted to offer bothdeposits and nondeposit investmentproducts, a bank could reduce thetemptation by compensating the em-ployee for renewing maturing deposits aswell as for selling nondeposit investmentproducts. Examiners should discuss withbank management where appropriate themethods used to avoid possible conflictsof interest potentially arising from thebank's compensation plan.

To investigate whether incentive compen-sation schemes could induce salespersonsto recommend products with higher com-missions over a more suitable option, ex-aminers should look to customer com-plaints and to sales patterns rather thanto individual sales. For example, anexaminer can look for instances in whichsales for a particular product increasedafter changes to an incentivecompensation system.

Examiners also should expect a bank toincrease its supervision of sales programsas it increases its incentive com-pensation. Examiners should be critical ofsupervision that does not take intoa c c o u n t t h e p o s s i b i l i t y t h a trecommendations for purchases ofnondeposit investment products could beinfluenced by the incentive compensationscheme.

If the overall setting and circumstancesof a bank's investment sales programappears to be only marginallysatisfactory, examiners should regardhigher incentive compensation on certaininvestment products and lowercompensation on deposits and otherinvestment products as having the poten-tial for causing serious problems. In thiscase the compensation system itselfshould justify an increase in the level ofbank management supervision. Ifsupervision is not adequate, the examinershould criticize the compensation systemand other objectionable factors in the

setting and circumstance of the sale.

Bank supervisory employees who reviewand approve individual sales, accept newaccounts, and review establishedcustomer accounts should not receiveincentive compensation based on theprofitability of individual trades oraccounts that are subject to their review.Similarly, department auditors orcompliance personnel should not partici-pate in incentive compensation programsthat are based directly on the success ofsales efforts nor should they report to amanager who receives this type of incen-tive compensation. In addition, bankmanagement should not rely on thirdparty audit and control systems if thatvendor's control personnel receivet r a n s a c t i o n - b a s e d i n c e n t i v ecompensation.

Bank employees, including tellers, mayreceive a one-time nominal fee of a fixeddollar amount for each customer referredfor nondeposit investment products. Thepayment of this referral fee should notdepend on whether the referral results ina transaction.

Fiduciary AccountsPursuant to 12 CFR 9.11(d), examinerswill review the investments held bynational banks as fiduciary to determinewhether such investments are inaccordance with law, 12 CFR 9, andsound fiduciary principles. In so doing,they will ensure that the bank hascomplied with all applicable state andfederal restrictions on investmenttransactions involving the bank'sfiduciary accounts.

Under 12 CFR 9.12, national bank fiduci-aries may not invest funds held asfiduciary in the stock of organizationswith which there exists such aconnection as may affect the exercise ofthe best judgment of the bank inacquiring the stock, unless there exists



specific authority for such an investmentin the governing instrument, local law, acourt order or through consents from allbeneficiaries. As to accounts subject tothe Employee Retirement Income SecurityAct of 1974, such investments must bewithin the authority of that Act. Theseprinciples govern purchases of a bank'sproprietary products, such as bank-advised mutual funds and private labelmutual funds for fiduciary accounts. In addition, pursuant to 12 CFR 9.11(d),examiners will determine that fiduciarypurchases and retention of bankproprietary products for fiduciaryaccounts are in accord with soundfiduciary principles. This requires thateven if specific authority exists forfiduciary accounts to purchase or retainbank-advised or bank private label mutualfunds, the assets must be appropriate foreach account. The investment must beconsistent with the purpose for whicheach account was created, and suitablefor the beneficial interest holders of eachaccount. This requirement exists as topurchases for individual accounts, and forconversions of collective investmentfunds to bank-advised mutual funds.

Twelve CFR 9.7 requires banks toconduct initial and annual reviews ofeach fiduciary account as well as aseparate review of all securities by issuerto ensure compliance with theserequirements. These reviews include:

! A documented review of each ac-count to determine that the assetsof that account, including anyproprietary products, meet theinvestment objectives of the ac-count. In structuring the accountportfolio, the fiduciary mustconsider the provisions of thedocument establishing the ac-count. The review must also takeinto account the needs of thebeneficial interest holders. Thisreview should address the issuesset forth in the Comptroller's

Handbook for Fiduciary Activities,"Portfolio Management."

! A documented annual review of allassets by issuer, including propri-etary products. This review shouldconsider the quality of fund man-agement, fee structure, riskdiversification and anticipated ratesof return. It should also addressthe considerations set forth in theComptrol ler's Handbook forFiduciary Activities, "Investments."

Compliance ProgramBanks must maintain complianceprograms capable of verifying compliancewith the guidelines specified in theInteragency Statement and with anyother applicable requirements. Banksshould perform nondeposit investmentcompliance programs independently ofinves tment p roduct sa les andmanagement. At a minimum, thecompliance function should include a sys-tem to monitor customer complaints andto review customer accounts periodicallyto detect and prevent abusive practices.

Examiners reviewing the complianceoperations of a bank offering a variety ofretail investment products should ensurethat the bank has comprehensive self-regulatory policies and that it isconducting an ongoing comparison ofthe bank's investment sales practiceswith its stated investment policy. Inbanks with a less elaborate investmentsales program, where an internal auditinggroup may perform all of the bank'scompliance functions, the examinershould ensure that these auditors areperiodically comparing sales practiceswith policy.

Individuals performing the audit orcompliance of the bank's investmentprogram should be qualified and shouldhave the necessary experience to perform



the assigned tasks. Compliancepersonnel should also engage in ongoingtraining to keep abreast of emergingdevelopments in banking and securitieslaws and regulations.

Banks can establish independence ofaudit or compliance personnel if suchpersonnel determine the scope,frequency, and depth of their ownreviews; report their findings directly tothe board of directors or an appropriatecommittee of the board; have theirperformance evaluated by personsindependent of the investment productsales function; and receive compensationthat is not connected to the success ofinvestment product sales.

Bank compliance programs should bemodeled after those in the securitiesbusiness where it is customary forcompliance personnel to conduct regularand frequent customer account reviewsin order to detect and prevent abuses.The extent and frequency of customeraccount supervision should be dictatedby the aggressiveness of the salesprogram and the riskiness of productsbeing offered.

Examiners should expect the bank to as-sign individuals independent of the salesforce to review periodically customer re-sponses to suitability inquiries and tocompare these responses to the type andvolume of account activity to determinewhether the activity in an account isappropriate. If account activity isunusual relative to the customer's statedobjectives and risk tolerance, or ifaccount activity is brisk relative to thesize of a customer's investment or pastpractices, management should makefollow-up inquiries to determine if theactivity serves the best interests of thecustomer.

If examinations or routine oversight bybank management indicates that

suitability problems may exist, bankmanagement is expected to conduct itsown review of all affected accounts andto institute corrective actions. If it isdetermined that customers may havebeen disadvantaged, corrective actionsshould be designed on a case-by-casebasis and may include full explanations tocustomers and, where appropriate, offersto rescind trades.

Customer complaints are an indication ofpotential problems that warrant a promptaccount review. Examiners should expectthe bank to assign a bank officer who isindependent of the sales force theresponsibility for approving the resolutionof complaints or reviewing the resolutionof complaints by a third party vendor.The examiner should evaluate the systemfor assuring that all complaints (writtenand oral) receive management's attentionby reviewing the bank's audit of thecomplaint resolution system.

Managers of high-volume investmentsales programs also often use automatedexception reporting systems to flagpotential problems before customerscomplain. Such systems monitor productsales and the performance ofsalespersons. If the bank has suchsystems in place, and if the reports showsignificant volumes of mutual fundredemptions after short holding periods,examiners should review the stepsmanagement has taken to investigatewhether the product is being soldproperly.

If early redemptions are restricted to onesalesperson or one branch, managementcan reasonably conclude that the problemis localized. However, early redemptionsoccurring throughout the sales networkmay indicate that something is wrongwith the product itself or with thetraining provided to salespeople.Similarly, if reports indicate that asalesperson is selling one type of product



almost exclusively, management mayneed to review that individual'sperformance or training.

Ultimately, the way for bank manage-ment to assure itself that the securitiessalespersons are providing the requireddisclosures and making suitablerecommendations to customers is to"test" the sales program. Effective"tests" can be conducted in several ways.Larger banks sometimes employ "testers"who pose as prospective customers andtest the sales presentations for a varietyof issues including adherence tocustomer protection standards. Manyother well-managed banks (of all sizes)have instituted follow-up programs toverify that their customers understoodtheir investment transactions. A bankmanager, who is independent of the salesforce, may telephone customers a fewdays after an investment account isopened or an unusual transaction hastaken place. The manager will determineif the customer understands what he orshe has purchased; understands the risks,including the uninsured nature of theproduct; understands the bank's role inthe transaction; and can generallyconfirm responses to a suitability inquirypreviously provided.

A bank officer usually can determine if acustomer understands an investment byasking the customer to describe itsgeneral features. The customer should beable to describe how the product worksand its risks rather than simply recitewhat he or she hopes to gain from theparticular investment. Managers usuallyalso determine if the customer is satisfiedwith the product and service or has anyproblems or suggestions for improvingservice. If a bank institutes a telephonefollow-up program, it should maintain arecord of conversations with customersto resolve problems or disputes that mayarise at a later date.

"Negative consent" letters (e.g., noticesinforming customers that unless they ob-ject, the bank assumes the customer un-derstands and does not object to thetransactions) may be a useful element ina compliance program but should not bethe sole means of verifying thatcustomers understand nondepositinvestment product transactions and thebank's role in the process.

Examiners should determine whether abank officer has been assigned theresponsibility for assuring that the bankadequately monitors the nondepositinvestment accounts of customers.Examiners should also determine whetherthe officer has developed or is developinga system to monitor the customeraccount reviews of outside vendorsoperating bank-related sales programs.

Oversight of Third Party VendorsWhen a bank uses a third party vendor tosell nondeposit investment products, thebank's board of directors must adopt awritten policy addressing the scope ofthe activities of the third party, as well asthe procedures the bank intends to usefor monitoring the third party'scompliance with the InteragencyStatement.

To select the third party vendor andmonitor the ongoing acceptability of thevendor, bank management usuallyreviews the vendor's experience in thebusiness and the vendor's financialstatement. Bank management alsousually contacts other banks with whichthe vendor has done business forreferences. Examiners should also expectthat bank management checked with thevendor's regulator before it entered intoan agreement with the vendor and thatmanagement has continued to reviewreports furnished to the vendor by itsregulator(s).

Bank management should enter into a



written agreement with a third party ven-dor that has been approved by the bank'sboard of directors before the vendor ispermitted to offer nondeposit investmentproducts to the bank's customers. Theagreement should outline the duties andresponsibilities of each party and shouldinclude a description of all of theactivities the third party is permitted toengage in on the bank's premises. Theagreement also should set forth terms forthe use of the bank's space, personnel,and equipment as well as compensationarrangements for personnel of the bankand the third party. The agreement alsoshould:

! Specify that the third party willcomply with all applicable laws andr egu l a t i ons and w i l l a c tconsistently with the provisions ofthis temporary insert, especially theprovisions relating to customerdisclosures,

! Authorize the bank to monitor thethird party by periodicallyreviewing and verifying that thethird party and its salesrepresentatives are complying withits agreement with the bank, withall applicable laws and regulations,and with the provisions of thistemporary insert,

! Specify the type, scope, and fre-quency of reports the third party isto furnish to bank management topermit bank management to fulfillits oversight responsibilities,

! Authorize the institution and theOCC to have access to appropriaterecords of the third party,

! Require the third party to agree toindemnify the bank for any liabilitythat resulted from third partyinvestment product sales programactions,

! Set forth the training which thebank expects its employees andthird party personnel to possess,and

! Provide for written employment

contracts between the bank andthe third party vendor's employees.

Examiners will review the agreement todetermine that it specifies that the thirdparty vendor will comply with allapplicable requirements contained in theInteragency Statement. Examiners alsowill review the agreement to determine ifit includes provisions regarding bankoversight and examiner access toappropriate records. It is expected thatcompliance with the agreement will beperiodically monitored by the institution'ssenior management.

Before entering into an agreement with athird party vendor, bank managementalso should be satisfied that the vendoruses a product selection process similarto the one outlined below. Banks relyingon a third party vendor to select productsalso should understand and agree withthe vendor's method of analysis anddocument its concurrence with thatmethod. Examiners should determinewhether management has understoodand concurred. Bank management shouldperiodically investigate the vendor'sproduct selection process to ensure thatit continues to be appropriate to thebank's customer mix. Examiners alsoshould determine whether bank man-agement understands and agrees withcontingency plans developed by the thirdparty vendor and the product issuer torespond to customer orders duringunusual surges in redemptions.

To fulfill its oversight responsibilities, it isexpected that bank management will re-ceive various reports from the third partyvendor and have access to the vendor'sappropriate records. The reports receivedwill vary with the scope of the sales pro-gram and should be tailored to the needsof the institution. The reports shouldalways include a list of all customercomplaints and their resolution. Otherreports that may facilitate bank



management's oversight role, couldinclude:

! A periodic listing of all newaccount openings and descriptionsof the initial trades;

! A list of significant or unusual (forthe customer) individual salesduring a reporting period;

! Sales reports by product, salesper-son, and location during areporting period; and

! Reports of internal compliance re-views of customer accountsoriginated at the bank and reportsfurnished to the third party vendorby its regulator(s) on at least anannual basis.

Bank management must monitor compli-ance by third party vendors on anongoing basis. Senior bank managerswill be expected to ensure that specificindividuals employed by the bank and bythe third party vendor are responsible foreach activity outlined in the bank'sinvestment sales policy. The degree ofbank management's involvement shouldbe dictated by the types of productsbeing offered, the volume of sales, thenature of customers' complaints, and theeffectiveness of the third party vendor'scustomer protection systems.

Senior bank management also should ap-point an officer responsible for ensuringthat bank investment advertisements aswell as advertisements prepared byanother party that refer to the bank, orany advertisement used in bank-relatedsales, are accurate, not misleading, andinclude all required disclosures. Inaddition, any advertising or promotionalmaterial ) prepared by or on behalf of athird party vendor ) should clearlyidentify the company selling thenondeposit investment product andshould not suggest that the depositoryinstitution is the seller.

Examiner access to the records of third

party vendors should be governed by pre-liminary examination findings. Whensuch findings make it clear that bankmanagement has discharged its oversightresponsibi l i ty by reviewing andresponding appropriately to third partyreports, only a few customer complaintshave been filed against the vendor, andthe vendor's reports are timely,sufficiently detailed, and prepared bysomeone independent of the vendor'ssales force, examiner access to third partyrecords should generally be limited to thereports furnished to management by thevendor.

Product Selection This section describes in general termsthe methods that well-managed banksuse to select specific nondepositinvestment products and to determinethat such products continue to beacceptable to the bank's customer mix.This information is provided to helpexaminers understand and review theprocess used by well-managed banks tomake this determination.

Bank management should determine thespecific laws, regulations, regulatoryconditions or other limitations orrequirements, including qualitativeconsiderations, that will govern the saleof products to be offered. Although notrequired, most well-run bank investmentsales programs limit the number ofproducts offered so that customers andsalespersons will not be presented withan overwhelming number of choices.Limitations based on product quality mayalso make it easier for sales managers toshield certain classes of customers frominappropriate products.

As a general practice, bank investmentprograms offer at least one type ofmoney market mutual fund for customerswho are interested in liquidity. Inaddition, most banks offer a U.S.government bond fund for customers



who stress safety and steady income, anequity fund for customers interested incapital growth, and a tax-exempt bondfund for customers who wish to avoidtaxes on investment earnings.

When deciding which funds to offer,managers should review the fund'sperformance over an extended period oftime. Most bank managers prefer toavoid mutual funds with volatile records.Management's selection of a family offunds should not be based on theperformance of one particular fund; eachfund selection should stand on its ownmerits.

Management's selection of investmentproducts usually begins with anevaluation of the stability of asset valuesover time and an assessment of yields toinvestors. Management also comparesthe performance of other funds withsimilar objectives over the same period(s).Specialized ratings services (such asMorningstar or Lipper) or rankings byanalytical services are usually regarded asnecessary but secondary considerations.

Management also considers the fund'strack record in terms of both risk and re-ward. Management analyzes the fund'snet asset value versus total return, itsmanagement or operating expenses, theturnover within the fund's portfolio, andcapital gains and other sources ofincome. Other key considerations includethe composition of the portfolio andconcentrations in types of holdings,sector weights, and, in the case of equityfunds, the percentage of ownershiprepresented by individual issues.

Management also evaluates importantnon-statistical factors such as thecontinuity, tenure, and demonstratedtalent of the fund's management. Theyalso may consider factors such as thequality of a mutual fund's operationaland marketing support.

The bank itself, and not another entity'smarketing department, should select thefunds to be offered. Independentcommittees and qualified analysts shouldmake the final selections, not a salesmanager whose view of the commissionstructure may affect this judgment.

If the bank uses outside consultants tohelp select a mutual fund, bankmanagement should determine whetherthe consultant receives compensationfrom mutual funds or mutual fundwholesalers. If the analysis is performedby another party, such as a clearingbroker or third party vendor, bankmanagement should understand andagree with the method of analysis andshould document the bank's concurrence.

Regardless of who selects the mutualfund products, bank management will beexpected to consider the issuer'scontingency plans for handling unusualsurges in redemptions at the time suchproducts are being considered. Suchcontingency plans normally includeemergency staffing, communications, andoperational programs that are based onvarious market scenarios. Bankmanagement should compare thesecontingency plans to the expected needsof bank customers during periods ofstress.

Finally, once the initial selection processis complete, bank management shouldconduct ongoing reviews to assure thatthe products remain acceptable in light ofthe bank's objectives and customer'sneeds.

Selection of annuity products isconducted in the same manner. Avariable-rate annuity, a hybrid form ofinvestment that contains elements ofmutual funds and insurance, could becharacterized as a mutual fund operatedby an insurance company. During



product selection, bank managementshould consider the performance andcomposition of the portfolio that isdedicated to the annuity holders.

Selection analysis for fixed-rate annuitiesdiffers from variable-rate annuities. Sincefixed-rate annuities are obligations ofinsurance companies, the risks associatedwith them relate to the issuer's ability tohonor the terms of the annuity contract.Accordingly, the safety of an annuitydepends upon the financial standing ofthe firm that issues it and the selectionanalysis involves an assessment of thequality and diversification of thecompany's assets, its holdings of junkbonds, mortgage-backed securities, andproblem real estate loans, as well as thecontinuity of management.

Because it is difficult to independentlyanalyze 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 partin annuity analysis. If bank managementrelies significantly on such ratings ratherthan on its own analysis, however,examiners should expect that the issuerselected by the bank has received topratings from most of the ratings services.

When analyzing annuities, managementalso should recognize that an issuinginsurance company can, in certaincircumstances, sell or simply transfer theannuity contract to another insurancecompany, thereby extinguishing itsobligation to the purchaser of theannuity. Annuity owners are generally,but not always, asked to consent to thistransfer. A bank selling annuities shouldconsider the possibility of such a transferin its product selection analysis. At aminimum, the bank should disclose thispossibility to prospective customers.

Interagency Statement on Retail

Sales on Nondeposit InvestmentProducts

The full text of the interagency statementbegins on the next page.



Interagency Statement on RetailSales on Nondeposit InvestmentProductsFebruary 15, 1994

Introduction

Recently many insured depository institu-tions have expanded their activities inrecommending or selling to retailcustomers nondeposit investmentproducts, such as mutual funds andannuities. Many depository institutionsare providing these services at the retaillevel, directly or through various types ofarrangements with third parties.

Sales activities for nondeposit investmentproducts should ensure that customersfor these products are clearly and fully in-formed of the nature and risks associatedwith these products. In particular, wherenondeposit investment products arerecommended or sold to retail customers,depository institutions should ensure thatcustomers are fully informed that theproducts:! Are not insured by the FDIC;! Are not deposits or other obligations

of the institution and are notguaranteed by the institution; and,

! Are subject to investment risks,including possible loss of principalinvested.

Moreover, sales activities involving theseinvestment products should be designedto minimize the possibility of customerconfusion and to safeguard theinstitution from liability under theapplicable anti-fraud provisions of thefederal securities laws, which, amongother things, prohibit materiallymisleading or inaccurate representationsin connection with the sale of securities.

The four federal banking agencies ) theBoard of Governors of the Federal ReserveSystem, the Federal Deposit Insurance

Corporation, the Office of theComptroller of the Currency, and theOffice of Thrift Supervision ) are issuingthis Statement to provide uniformguidance to depository institutionsengaging in these activities.

(Note: Each of the four banking agencieshas in the past issued guidelinesaddressing various aspects of the retailsale of nondeposit investment products.OCC Banking Circular 274 (July 19,1993); FDIC Supervisory Statement FIL-71-93 (October 8, 1993); Federal ReserveLetters SR 93-35 (June 17, 1993), and SR91-14 (June 6, 1991); OTS Thrift Bulletin23-1 (September 7, 1993). ThisStatement is intended to consolidate andmake uniform the guidance contained inthe various existing statements of eachof the agencies, all of which aresuperseded by this Statement. Some ofthe banking agencies have adoptedadditional guidelines covering the sale ofcertain specific types of instruments bydepository institutions, i.e., obligationsof the institution itself or of an affiliateof the institution. These guidelinesremain in effect except where clearlyinapplicable.)

Scope

This Statement applies when retailrecommendations or sales of nondepositinvestment products are made by:! Employees of the depository

institution;! Employees of a third party, which may

or may not be affiliated with theinst i tut ion ( see Note, below,addressing which institutions are cov-ered), occurring on the premises ofthe institution (including telephonesales or recommendations by employ-ees or from the institution's premisesand sales or recommendationsinitiated by mail from its premises);and

! Sales resulting from a referral of retail



customers by the institution to a thirdparty when the depository institutionreceives a benefit for the referral.

(Note: This Statement does not apply tothe subsidiaries of insured state nonmem-ber banks, which are subject to separateprovisions, contained in 12 CFR 337.4,relating to securities activities. For OTS-regulated institutions that conduct salesof nondeposit investment productsthrough a subsidiary, these guidelinesapply to the subsidiary. 12 CFR 545.74also applies to such sales. Branches andagencies of U.S. foreign banks shouldfollow these guidelines with respect totheir nondeposit investment salesprograms.)

These guidelines generally do not applyto the sale of nondeposit investmentproducts to non-retail customers, such assales to fiduciary accounts administeredby an institution. (Note: Restrictions ona national bank's use as fiduciary of thebank's brokerage service or other entitywith which the bank has a conflict ofinterest, including purchases of thebank's proprietary and other products, areset out in 12 CFR 9.12. Similarrestrictions on transactions betweenfunds held by a federal savingsassociation as fiduciary and any person ororganization with whom there exists aninterest that might affect the bestjudgment of the association acting in itsfiduciary capacity are set out in 12 CFR550.10. However, as part of its fiduciaryresponsibility, an institution should takeappropriate steps to avoid potential cus-tomer confusion when providingnondeposit investment products to theinstitution's fiduciary customers.)

Adoption of Policies andProcedures

Program Management. A depositoryinstitution involved in the activities

described above for the sale ofnondeposit investment products to itsretail customers should adopt a writtenstatement that addresses the risksassociated with the sales program andcontains a summary of policies andprocedures outlining the features of theinstitution's program and addressing, ata minimum, the concerns described inthis Statement. The written statementshould address the scope of activities ofany third party involved, as well as theprocedures for monitoring compliance bythird parties in accordance with theguidelines below. The scope and level ofdetail of the statement shouldappropriately reflect the level of theinstitution's involvement in the sale orr ecommenda t i on o f nondepos i tinvestment products. The institution'sstatement should be adopted andreviewed periodically by its board ofdirectors. Depository institutions areencouraged to consult with legal counselwith regard to the implementation of anondeposit investment product salesprogram.

The institution's policies and proceduresshould include the following:! Compliance procedures. The proce-

dures for ensuring compliance withapplicable laws and regulations andconsistency with the provisions of thisStatement.

! Supervision of personnel involved insales. A designation by senior man-agers of specific individuals toexercise supervisory responsibility foreach activity outlined in theinstitution's policies and procedures.

! Types of products sold. The criteriagoverning the selection and review ofeach type of product sold or recom-mended.

! Permissible use of customer informa-tion. The procedures for the use ofinformation regarding the institution'scustomers for any purpose in connec-tion with the retail sale of nondeposit



investment products.! Designation of employees to sell

investment products. A description ofthe responsibilities of those personnelauthorized to sell nondeposit invest-ment products and of other personnelwho may have contact with retailcustomers concerning the salesprogram, and a description of anyappropriate and inappropriate referralactivit ies and the trainingrequirements and compensationarrangements for each class of person-nel.

Arrangements with Third Parties. If adepository institution directly or indi-rectly, including through a subsidiary orservice corporation, engages in activitiesas described above under which a thirdparty sells or recommends nondepositinvestment products, the institutionshould, prior to entering into thearrangement, conduct an appropriatereview of the third party. The institutionshould have a written agreement with thethird party that is approved by theinstitution's board of directors. Compliance with the agreement shouldbe periodically monitored by theinstitution's senior management. At aminimum, the written agreement should:! D e s c r i b e t h e d u t i e s a n d

responsibilities of each party,including a description of permissibleactivities by the third party on theinstitution's premises, terms as to theuse of the institution's space, per-sonnel, and equipment, and compen-sation arrangements for personnel ofthe institution and the third party.

! Specify that the third party willcomply with all applicable laws andregulations, and will act consistentlywith the provisions of this Statementand, in particular, with the provisionsrelating to customer disclosures.

! Authorize the institution to monitorthe third party and periodically reviewand verify that the third party and its

sales representatives are complyingwith its agreement with theinstitution.

! Authorize the institution and theappropriate banking agency to haveaccess to such records of the thirdparty as are necessary or appropriateto evaluate such compliance.

! Require the third party to indemnifythe institution for potential liabilityresulting from actions of the thirdparty with regard to the investmentproduct sales program.

! Provide for written employment con-tracts, satisfactory to the institution,for personnel who are employees ofboth the institution and the thirdparty.

General Guidelines

1. Disclosures and AdvertisingThe banking agencies believe that recom-mending or selling nondeposit investmentproducts to retail customers should occurin a manner that assures that theproducts are clearly differentiated frominsured deposits. Conspicuous and easyto comprehend disclosures concerningthe nature of nondeposit investmentproducts and the risk inherent ininvesting in these products are one of themost important ways of ensuring that thedifferences between nondeposit productsand insured deposits are understood.

Content and Form of Disclosure. Disclo-sures with respect to the sale or recom-mendation of these products should, at aminimum, specify that the product is:! Not insured by the FDIC;! Not a deposit or other obligation of,

or guaranteed by, the depositoryinstitution;

! Subject to investment risks, includingpossible loss of the principal amountinvested.

The written disclosures described aboveshould be conspicuous and presented in



a clear and concise manner. Depositoryinstitutions may provide any additionaldisclosures that further clarify the risksinvolved with particular nondepositinvestment products.

Timing of Disclosure. The minimumdisclosures should be provided to thecustomer:! Orally during any sales presentation,! Orally when investment advice

concerning nondeposit investmentproducts is provided,

! Orally and in writing prior to or at thetime an investment account is openedto purchase these products, and

! In advertisements and otherpromotional materials, as describedbelow.

A statement, signed by the customer,should be obtained at the time such anaccount is opened, acknowledging thatthe customer has received andunderstands the disclosures. Forinvestment accounts established prior tothe issuance of these guidelines, theinstitution should consider obtainingsuch a signed statement at the time ofthe next transaction.

Confirmations and account statementsfor such products should contain at leastthe minimum disclosures if theconfirmations or account statementscontain the name or the logo of thedepository institution or an affiliate.(Note: These disclosures should be madein addition to any other confirmationdisclosures that are required by law orregulation, e.g., 12 CFR 12, 208.8(k)(3),and 344.) If a customer's periodicdeposit account statement includesaccount information concerning thecustomer's nondeposit investmentproducts, the information concerningthese products should be clearly separatefrom the information concerning thedeposit account, and should beintroduced with the minimum disclosures

and the identity of the entity conductingthe nondeposit transaction.

Advertisements and Other PromotionalMaterial. Advertisements and otherpromotional and sales material, written orotherwise, about nondeposit investmentproducts sold to retail customers shouldconspicuously include at least theminimum disclosures discussed above andmust not suggest or convey anyinaccurate or misleading impression aboutthe nature of the product or its lack ofFDIC insurance. The minimumdisclosures should also be emphasized intelemarketing contacts. Any third partyadvertising or promotional materialshould clearly identify the companyselling the nondeposit investmentproduct and should not suggest that thedepository institution is the seller. Ifbrochures, signs, or other written materialcontain information about both FDIC-insured deposits and nondepositinvestment products, these materialsshould clearly segregate informationabout nondeposit investment productsfrom the information about deposits.

Additional Disclosures. Whereapplicable, the depository institutionshould disclose the existence of anadvisory or other material relationshipbetween the institution or an affiliate ofthe institution and an investmentcompany whose shares are sold by theinstitution and any material relationshipbetween the institution and an affiliateinvolved in providing nondeposit invest-ment products. In addition, whereapplicable, the existence of any fees,penalties, or surrender charges should bedisclosed. These additional disclosuresshould be made prior to or at the time aninvestment account is opened topurchase these products.

If sales activities include any written ororal representations concerning insurancecoverage provided by any entity other



than the FDIC, e.g., the SecuritiesInvestor Protection Corporation (SIPC), astate insurance fund, or a privateinsurance company, then clear andaccurate written or oral explanations ofthe coverage must also be provided tocustomers when the representationsconcerning insurance coverage are made,in order to minimize possible confusionwi th FD IC i nsu rance . Suchrepresentations should not suggest orimply that any alternative insurancecoverage is the same as or similar to FDICinsurance.

Because of the possibility of customerconfusion, a nondeposit investment prod-uct must not have a name that isidentical to the name of the depositoryinstitution. Recommending or selling anondeposit investment product with aname similar to that of the depositoryinstitution should only occur pursuant toa sales program designed to minimize therisk of customer confusion. Theinstitution should take appropriate stepsto assure that the issuer of the producthas complied with any applicablerequirements established by theSecurities and Exchange Commission re-garding the use of similar names.

2. Setting and CircumstancesSelling or recommending nondepositinvestment products on the premises of adepository institution may give theimpression that the products are FDIC-insured or are obligations of thedepository institution. To minimizecustomer confusion with depositproducts, sales or recommendations ofnondeposit investment products on thepremises of a depository institutionshould be conducted in a physicallocation distinct from the area whereretail deposits are taken. Signs or othermeans should be used to distinguish theinvestment sales area from the retaildeposit-taking area of the institution.However, in the limited situation where

physical considerations prevent sales ofnondeposit products from beingconducted in a distinct area, theinstitution has a heightened responsibilityto ensure appropriate measures are inplace to minimize customer confusion.

In no case, however, should tellers andother employees, while located in theroutine deposit-taking area, such as theteller window, make general or specificinvestment recommendations regardingnondeposit investment products, qualifya customer as eligible to purchase suchproducts, or accept orders for such prod-ucts, even if unsolicited. Tellers andother employees who are not authorizedto sell nondeposit investment productsmay refer customers to individuals whoare specifically designated and trained toassist customers interested in thepurchase of such products.

3. Qualifications and TrainingThe depository institution should ensurethat its personnel who are authorized tosell nondeposit investment products or toprovide investment advice with respect tosuch products are adequately trainedwith regard to the specific productsbeing sold or recommended. Trainingshould not be limited to sales methods,but should impart a thorough knowledgeof the products involved, of applicablelegal restrictions, and of customerprotection requirements. If depositoryinstitution personnel sell or recommendsecurities, the training should be thesubstantive equivalent of that requiredfor personnel qualified to sell securities asregistered representatives. (Note:Savings associations are not exempt fromthe definitions of "broker" and "dealer" inSections 3(a)(4) and 3(a)(5) of the Securi-ties Exchange Act of 1934; therefore, allsecurities sales personnel in savingsassociations must be registeredrepresentatives.)

Depository institution personnel with



supervisory responsibilities should receivetraining appropriate to that position.Training should also be provided toemployees of the depository institutionwho have direct contact with customersto ensure a basic understanding of theinstitution's sales activities and the policyof limiting the involvement of employeeswho are not authorized to sell investmentproducts to customer referrals. Trainingshould be updated periodically andshould occur on an ongoing basis.

Depository institutions should investigatethe backgrounds of employees hired fortheir nondeposit investment productssales programs, including checking forpossible disciplinary actions by securitiesand other regulators if the employeeshave previous investment industryexperience.

4. Suitability and Sales PracticesDepository institution personnel involvedin selling nondeposit investment productsmust adhere to fair and reasonable salespractices and be subject to effectivemanagement and compliance reviewswith regard to such practices. In thisregard, if depository institution personnelrecommend nondeposit investmentproducts to customers, they should havereasonable grounds for believing that thespecific product recommended is suitablefor the particular customer on the basisof information disclosed by the customer.Personnel should make reasonable effortsto obtain information directly from thecustomer regarding, at a minimum, thecustomer's financial and tax status,investment objectives, and otherinformation that may be useful orreasonable in making investment recom-mendations to that customer. This infor-mation should be documented andupdated periodically.

5. CompensationDepository institution employees,including tellers, may receive a one-time

nominal fee of a fixed dollar amount foreach customer referral for nondepositinvestment products. The payment ofthis referral fee should not depend onwhether the referral results in atransaction.

Personnel who are authorized to sellnondeposit investment products may re-ceive incentive compensation, such ascommissions, for transactions enteredinto by customers. However, incentivecompensation programs must not bestructured in such a way as to result inunsuitable recommendations or salesbeing made to customers.

Depository institution compliance andaudit personnel should not receiveincentive compensation directly related toresults of the nondeposit investmentsales program.

6. ComplianceDepository institutions should developand implement policies and procedures toensure that nondeposit investmentproduct sales activities are conducted incompliance with applicable laws andregulations, the institution's internalpolicies and procedures, and in a mannerconsistent with this Statement.Compliance procedures should identifyany potential conflicts of interest andhow such conflicts should be addressed.The compliance procedures should alsoprovide for a system to monitor customercomplaints and their resolution. Whereapplicable, compliance procedures alsoshould call for verification that third partysales are being conducted in a mannerconsistent with the governing agreementwith the depository institution.

The compliance function should be con-ducted independently of nondeposit in-vestment product sales and managementactivities. Compliance personnel shoulddetermine the scope and frequency oftheir own review, and findings of



compliance reviews should be periodicallyreported directly to the institution'sboard of directors, or to a designatedcommittee of the board. Appropriateprocedures for the nondeposit investmentproduct programs should also beincorporated into the institution's auditprogram.

Supervision by Banking Agencies

The federal banking agencies willcontinue to review a depositoryinstitution's policies and proceduresgoverning recommendations and sales ofnondeposit investment products, as wellas management's implementation andcompliance with such policies and allother applicable requirements. Thebanking agencies will monitor compliancewith the institution's policies andprocedures by third parties thatparticipate in the sale of these products.The failure of a depository institution toestablish and observe appropriate policiesand procedures consistent with thisStatement in connection with salesac t i v i t i e s i n vo l v i ng nondepos i tinvestment products will be subject tocriticism and appropriate correctiveaction.

Questions on the Statement may be sub-mitted to:FRB ) Division of Banking Supervision

and Regulation, SecuritiesRegulation Section, (202) 452-

2781; Legal Division, (202) 452-2246.

FDIC ) Office of Policy, Division of Supervision, (202) 898-6759;Regulation and Legislation Sec-tion, Legal Division (202) 898-3796.

OCC ) Office of the Chief NationalBank Examiner, Capital MarketsGroup, (202) 874-5070.

OTS ) Office of Supervision Policy,(202) 906-5740; Corporate andSecurities Division, (202) 906-7289.

Effective date: February 15, 1994

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