I. INTRODUCTION
Many insured depository institutions have expanded their activities in recommending or selling nondeposit investment products, such as mutual funds and annuities, to retail customers. Many depository institutions are providing these services at the retail level, directly to customers or through various types of arrangements with third parties. These activities have come under a great deal of scrutiny by banking regulators and the public.
A number of concerns have been raised regarding the failure of banks to learn the financial needs of their clients and their failure to disclose that these investment products are not federally insured. The Federal Banking agencies (FRB, FDIC and OCC) issued an interagency statement to provide uniform guidance to depository institutions engaging in the sale of nondeposit investment products. The interagency statement provides that sales activities for nondeposit investment products should insure that customers for these products are clearly and fully informed of the nature and risks associated with these products. In particular, where nondeposit investment products are recommended or sold to retail customers, depository institutions should insure that customers are fully informed that the products:
The scope of the statement applies when retail recommendations or sales of nondeposit investment products are made by:
These guidelines generally do not apply to the sale of nondeposit investment products to non-retail customers, such as sales to fiduciary accounts administered by an institution. However, as part of its fiduciary responsibility, an institution should take appropriate steps to avoid potential consumer confusion when providing nondeposit investment products to the institution’s fiduciary customers.
II. ADOPTION OF POLICIES AND PROCEDURES
A. Program Management
An institution involved in activities for the sale of nondeposit investment products to its retail customers should adopt a written statement addressing the risks associated with the sales program and containing a summary of policies and procedures outlining the features of the institution’s program. The written statement should address the scope of activities of any third party involved, as well as the procedures for monitoring compliance by third parties in accordance with these guidelines. The scope and level of detail of the statement should appropriately reflect the level of the institution’s involvement in the sale or recommendation of nondeposit investment products and should be adopted and reviewed periodically by its board of directors.
The institution’s policies and procedures should include the following:
1. Compliance Procedures
To ensure compliance with applicable laws and regulations and consistency with the provisions of the interagency statement.
2. Supervision of Personnel Involved in Sales
Senior managers must designate specific individuals to exercise supervisory responsibility for each activity outlined in the institution’s policies and procedures.
3. Types of Products Sold
The institution must establish criteria to govern selection and review of each type of product sold or recommended.
4. Permissible Use of Customer Information
The institution must establish procedures for the use of information regarding the institution’s customers for any purpose in connection with the retail sale of nondeposit investment products.
5. Designation of Employees to Sell Investment Products
The institution must describe the responsibilities of personnel authorized to sell nondeposit investment products and of other personnel who may have contact with retail customers concerning the sales program; a description of any appropriate and inappropriate referral activities and the training requirements and compensation arrangements for each class of personnel.
B. Third Party Arrangements
If a depository institution directly or indirectly, including through a subsidiary or service corporation, engages in activities under which a third party sells or recommends nondeposit investment products, the institution should, prior to entering into the arrangement, conduct an appropriate review of the third party. The institution should have a written agreement with the third party that is approved by the institution’s board of directors and which at a minimum, should:
1. describe the duties and responsibilities of each party, including a description of permissible activities by the third party on the institution’s premises, terms as to the use of the institution’s space, personnel and equipment, and compensation arrangements for personnel of the institution and the third party;
2. specify that the third party will comply with all applicable laws and regulations, and will act consistently with the provisions of this Statement and, in particular, with the provisions relating to customer disclosures;
3. authorize the institution to monitor the third party and periodically review and verify that the third party and its sales representatives are complying with its agreement with the institution;
4. authorize the institution and the appropriate banking agency to have access to such records of the third party as are necessary or appropriate to evaluate such compliance;
5. require the third party to indemnify the institution for potential liability resulting from actions of the third party with regard to the investment product sales program; and
6. provide for written employment contracts, satisfactory to the institution, for personnel who are employees of both the institution and the third party.
III. GENERAL GUIDELINES
A. Disclosures and Advertising
Products must be clearly differentiated from insured deposits. Conspicuous and easy to understand disclosures concerning the nature of nondeposit investment products and the risk inherent in investing in these products should be employed to be sure that customers understand the differences between nondeposit products and insured products.
B. Content and Form of Disclosure
Disclosures must, at a minimum, specify that the product is:
1. not insured by the FDIC;
2. not a deposit or other obligation of, or guaranteed by, the depository institution; and
3. subject to investment risks, including possible loss of the principal amount invested.
The written disclosures described above should be conspicuous and presented in a clear and concise manner. Depository institutions may provide any additional disclosures that further clarify the risks involved with particular nondeposit investment products.
C. Timing of Disclosure
The minimum disclosure should be provided to the customer:
1. orally during any sales presentation;
2. orally when investment advice concerning nondeposit investment products is provided;
3. orally and in writing prior to or at the time an investment account is opened to purchase these products; and
4. in advertisements and other promotional materials.
The institution should also obtain a statement, signed by the customer, at the time an account is opened, acknowledging that the customer has received and understands the disclosures. The guidelines recommend that for investment accounts established prior to the issuance of these guidelines, that the institution obtains such a signed statement at the time of the next transaction.
If the institution’s confirmations or account statements contain the name or the logo of the depository institution or an affiliate, the confirmations and account statements for such products should contain at least the minimum disclosures. If the customer’s periodic deposit account statement includes account information concerning the customer’s nondeposit investment products, the information concerning these products should be clearly separate from the information concerning the deposit account.
D. Advertisements and Other Promotional Material
Any advertisement or other promotional and sales material, written or otherwise, regarding nondeposit investment products sold to retail customers must conspicuously include at least the minimum disclosures described above and must not suggest or convey any inaccurate or misleading impression about the nature of the product or its lack of FDIC insurance. Telemarketing contacts should clearly emphasize the minimum disclosures and any third party advertising or promotional material must clearly identify the company selling the nondeposit investment product and should not suggest that the depository institution is the seller. Any promotional material containing information regarding both FDIC insured deposits and nondeposit investment products must clearly segregate information about nondeposit investment products from the information regarding deposits.
E. Additional Disclosures
If applicable, the depository institution must disclose the existence of an advisory or other material relationship between the institution or an affiliate of the institution and an investment company whose shares are sold by the institution and any material relationship between the institution and an affiliate involved in providing nondeposit investment products. In addition, where applicable, the existence of any fees, penalties, or surrender charges should be disclosed, with these additional disclosures to be made prior to or at the time an investment account is opened to purchase these products.
If sales activities include any written or oral representations concerning insurance coverage provided by any entity other than the FDIC (e.g., the Securities Investor Protection Corporation “SIPC”, a state insurance fund, or a private insurance company) clear and accurate written or oral explanations of the coverage must also be provided to customers when the representations concerning insurance coverage are made. Such representations must not suggest or imply that any alternative insurance coverage is the same as or similar to FDIC insurance.
Due to potential customer confusion, a nondeposit investment product must not have a name that is identical to the name of the depository institution. Recommending or selling a nondeposit investment product with a name similar to that of the depository institution should only occur pursuant to a sales program designed to minimize the risk of customer confusion.
F. Setting and Circumstances
To minimize customer confusion with deposit products, sales or recommendations of nondeposit investment products on the premises of a depository institution should be conducted in a physical location distinct from the area where retail deposits are taken. Signs or other means should be used to distinguish the investment sales area from the retail deposit-taking area of the institution. However, in the limited situation where physical considerations prevent sales of nondeposit products from being conducted in a distinct area, the institution must undertake increased responsibility to ensure appropriate measures are in place to minimize customer confusion.
Tellers and other employees, while located in the routine deposit-taking area, such as the teller window, are prohibited from making general or specific investment recommendations regarding nondeposit investment products, may not qualify a customer as eligible to purchase such products, or accept orders for such products, even if unsolicited. Tellers and other employees who are not authorized to sell nondeposit investment products may refer customers to individuals who are specifically designed and trained to assist customers interested in the purchase of such products.
G. Qualifications and Training
Personnel of depository institutions who are authorized to sell nondeposit investment products or to provide investment advice with respect to such products must be adequately trained regarding the specific products being sold or recommended. Training should not be limited to sales methods, but should impart a thorough knowledge of the products involved, of applicable legal restrictions, and of customer protection requirements. If the depository institution personnel sell or recommend securities, the training should be the substantive equivalent of that required for personnel qualified to sell securities as registered representatives. Training should also be provided to employees of the depository institution who have direct contact with customers to ensure a basic understanding of the institution’s sales activities and the policy of limiting the involvement of employees who are not authorized to sell investment products to customer referrals. Training should be updated periodically and should occur on an ongoing basis.
Depository institutions are also cautioned to investigate the backgrounds of employees hired for their nondeposit investment products sales programs, including a review of possible disciplinary actions by securities and other regulators if the employees have previous investment industry experience.
H. Suitability and Sales Practices
If depository institution personnel recommend nondeposit investment products to customers, they should have reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information disclosed by the customer. In this regard, personnel should attempt to obtain information directly from the customer regarding, at a minimum, the customer’s financial and tax status, investment objectives, and other information that may be useful or reasonable in making investment recommendations to that customer. The information obtained should be documented and periodically updated.
I. Compensation
Depository institution employees, including tellers, may receive a one-time nominal fee of a fixed dollar amount for each customer referral for nondeposit investment products. The payment of this referral fee should not depend on whether the referral results in a transaction.
Personnel who are authorized to sell nondeposit investment products may receive incentive compensation, such as commissions, for transactions entered into by customers. However, incentive compensation programs must not be structured in such a way as to result in unsuitable recommendations or sales being made to customers.
IV. COMPLIANCE
An institution’s compliance procedures must identify any potential conflicts of interest and how such conflicts should be addressed. The compliance procedures should also provide for a system to monitor customer complaints and their resolution. If applicable, the institution’s compliance procedures should verify that third party sales are being conducted in a manner consistent with the governing agreement with the depository institution.
Findings of compliance review should be periodically reported directly to the institution’s board of directors, or to a designated committee of the board. Appropriate procedures for the nondeposit investment product program should also be incorporated into the institution’s audit program.
V. REGULATORY SUPERVISION
The federal banking agencies will continue to review a depository institution’s policies and procedures governing recommendations and sales of nondeposit investment products, as well as management’s implementation and compliance with such policies and all other applicable requirements. The banking agencies will monitor compliance with the institution’s policies and procedures by third parties that participate in the sale of these products. The failure of a depository institution to establish and observe appropriate policies and procedures consistent with the Interagency statement in connection with sales activities involving nondeposit investment products will be subject to criticism and appropriate corrective action.
VI. CONCLUSION
Given the harsh criticism which has been levied upon bank sales of mutual funds and annuities, banks must be extremely careful in marketing nondeposit investment products. Congress is seriously reviewing complaints regarding bank sales of these products and may enact legislation to govern bank activities in this area. It is hoped that voluntary actions on behalf of the banking industry which are designed to educate customers on mutual funds and other nondeposit investment products and to provide adequate disclosures regarding the noninsured status and investment risks surrounding these products will allow the industry to avoid action by Congress.