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Retail Nondeposit Investment SalesIntroduction Section 413.1

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

This section sets forth guidance for examiners This section applies to sales to individualreviewing bank nondeposit investment prod- customers but does not apply to the whole-uct retail sales operations, including bank- sale sale of nondeposit investment productsrelated marketing and promotional activities. to non-retail customers, such as sales toExaminers will review a bank's programs for institutional customers or to fiduciary ac-consistency with the Interagency Statement counts administered by an institution. As parton Retail Sales of Nondeposit Investment of its general responsibilities, however, aProducts, dated February 15, 1994 (inter- national bank should take appropriate steps toagency Statement). The evaluation will cover avoid potential customer confusion whenall bank-related activities including: providing nondeposit investment products to

! Sales or recommendations made by institutional customers or to the bank's fidu-bank employees; ciary customers. For additional information on

! Sales or recommendations made by restrictions on a national bank's use as fidu-employees of affiliated or unaffiliated ciary of the bank's brokerage service or otherentities occurring on bank premises entity with which the bank has a conflict of(including sales or recommendations interest, including purchases of the bank'sinitiated by telephone or by mail from proprietary and other products, see 12 CFRbank premises); and 9.12 and "Sales to Fiduciary Accounts," later

! Sales resulting from referrals of retail in this section.customers to a third party when thebank receives a benefit for the refer-ral.

When reviewing a bank's nondeposit invest-ment sales operation, examiners should deter-mine that the bank views customers' interestsas critical to all aspects of its sales programs.Examiners should evaluate a bank's policiesand procedures from the customers' perspec-tive and should ascertain that customers areprovided with a high level of protection. If itbecomes necessary to recommend remedialaction, examiners should determine that bankmanagement responds immediately to anymatter that has the potential to confusecustomers as to the uninsured nature ofnondeposit investment products.

Banks that do not operate programs safelyand soundly or that engage in violations oflaw or regulations will be subject to appropri-ate regulatory action. When determining theappropriate action, examiners should bemindful that some banks, especially banksrelying on third parties for sales of nondepositinvestment products, may need time to con-form their programs to the Interagency State-ment and to the guidance contained herein. Ata minimum, however, examiners shoulddetermine whether bank management ismaking a good faith effort to comply with thisregulatory guidance in a timely manner.

ScopeExaminer reviews of a bank's mutual fund orother nondeposit investment sales programwill concentrate on the policies and proce-dures the bank adopts and on the effective-ness of their implementation.

When reviewing implementation of a bank'sprogram, examiners will investigate whethersenior bank management has:

(1) Participated in planning the bank's in-vestment sales program;

(2) Adopted a framework to ensure compli-ance with all applicable laws, rules,regulations, regulatory conditions, andthe Interagency Statement; and

(3) Ensured effective supervision of individ-uals engaged in sales activities, includingemployees of the bank and any otherentity involved in bank-related sales ofinvestment products.

Where relevant, references in this handbooksection to bank management or bank employ-ees includes third party managers or thirdparty employees.

Text Box

Replaced by Comptroller’s Handbook – Retail Nondeposit Investment Products. See OCC Bulletin 2015-2. Although section 413 has been rescinded, the Interagency Statement on pp. 16-21 of section 413.1 still applies to national banks and federal savings associations and can be found separately attached to OCC Bulletin 1994-13

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Minimum Standards for NondepositInvestment ProgramsAntifraud provisions of the federal securitieslaws prohibit materially misleading or inaccu-rate representation in connection with offersand sales of securities. (See, for example,Section 10 of the Securities Exchange Act of1934 and Rule 10b-5.) If customers aremisled about the nature of nondeposit invest-ment products, including their uninsuredstatus, sellers could face potential liabilityunder these antifraud provisions. Safe andsound banking also requires that bank-relatedretail sales activities be operated to avoidconfusing customers about the productsbeing offered. Use of nonbank employees tosell these products does not relieve bankmanagement of the responsibility to takereasonable steps to ensure that the invest-ment sales activities meet these requirements.

The Rules of Fair Practice of the NationalAssociation of Securities Dealers (NASD)expressly govern sales of securities by bro-ker/dealers who are members of NASD. Theserules apply to bank-related securities sales bybanking subsidiaries registered asbroker/dealers, affiliated broker/dealers, andunaffiliated broker/dealers operating underagreements with banks. These rules applywhether such sales are made on bank pre-mises or at a separate location.

These rules do not expressly apply to sales orrecommendations made directly by the bank.Even when these rules do not expresslyapply, however, they are an appropriatereference for a bank compliance programdesigned to ensure that the bank's retail salesof all nondeposit investment products areoperated in a safe and sound manner.

Before beginning to operate a nondepositinvestment sales program, banks may alsoconsider notifying their blanket bond carriersof plans to engage in these activities. If appli-cable, this could permit the bank to obtainwritten assurances from the carrier that thebank's insurance coverage for employeesincludes staff representing third party ven-dors.

Examiners also should encourage bank man-

agement to review Retail Investment Sales:Guidelines for Banks. The publication, pre-pared jointly by six banking industry tradeassociations, contains voluntary guidelines forbank sales of nondeposit investment productsas well as common sense suggestions forputting many of the OCC's recommendationsinto action.

Program ManagementBanks must comply with all applicable laws,rules, regulations, and regulatory conditions,and operate consistently with the InteragencyStatement for any of their bank-related retailsales of mutual funds, annuities, or otherretail nondeposit investment products. Bankdirectors are responsible for evaluating therisks imposed by bank-related sales and areexpected to adopt a program statement andself-regulatory policies and procedures toensure compliance with all requirements. Abank's policies and procedures must addressbank-related retail sales made directly by abank, through an operating subsidiary oraffiliate, or by an unaffiliated entity.

Examiners should expect that banks will tailortheir policies and procedures to the scope ofthe bank's sales activities. The level of detailcontained in a bank's policies and procedureswill depend on the structure and complexityof the bank's program.

Examiners will review the bank's securitiessales activities to determine that the bank hasadopted a statement that addresses the risksassociated with the sales program and de-scribes the features of the sales program, theroles of bank employees, and the roles ofthird party entities. The statement should setforth the strategies the bank will employ toachieve its objectives. It also should outlinethe self-regulatory procedures bank manage-ment will implement to ensure that the pro-gram's objectives are met without compro-mising the customers' best interests.

At a minimum, examiners should expect bankpolicies and procedures to address:

Supervision of personnel involved innondeposit investment sales programs --Senior bank managers will be expected to

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ensure that specific individuals employed by govern the selection and marketing ofthe bank, an affiliated broker/dealer, or a third products the bank will offer. (See "Productparty vendor are responsible for each activity Selection," later in this section for furtheroutlined in the bank's policies and procedures. discussion of these issues.)Managers of the bank's securities salesactivities will be accountable for Examiners should review:understanding the investment productsoffered and the sales process, as well as for ! The process the bank uses to select theassuring compliance with securities and products it will offer,banking laws, rules, and regulations. ! What the bank did to ensure the

Designation of employees authorized to sell expectations, andinvestment products - - This should serve as ! How well the bank is performing ana guide for all bank-related employees dealing ongoing analysis of the appropriatenesswith retail nondeposit investment product of the products offered for sale.customers. The program statement shouldspecify that only properly trained and Examiners will also assess the independencesupervised employees are permitted to make and thoroughness of the analysis and theinvestment sales or recommendations. It degree to which the bank relies on ratingsshould describe the responsibilities of services. Examiners should be critical of bankpersonnel authorized to sell or recommend managers who simply choose products thatnondeposit investment products and of other generate the largest sales fees or accept whatpersonnel who may have contact with retail a third party has to offer without performingcustomers concerning the sales program. It an independent analysis of the suitability ofalso should include a description of the products to the bank's strategy andappropriate and inappropriate referral activities customer mix.and the training requirements andcompensation arrangements for each category Examiners should not give the impression thatof personnel. the agency expects bank managers to be

The roles of other entities selling on bank limit the types of products banks offer.premises, including supervision of selling Instead, examiners should determine thatemployees -- Bank management must plan to bankers are selecting products that generallymonitor compliance by other entities on an meet their customers' needs.ongoing basis. The degree of bankmanagement's involvement should be dictated (See "Third Party Vendors," later in thisby the nature and extent of nondeposit section, for more details on the bank'sinvestment product sales, the effectiveness of oversight roles when it relies on its third partycustomer protection systems, and customer vendor to select products.)responses. (See "Third Party Vendors," laterin this section for more details on programs Policies governing the permissible uses ofoperated by third parties.) bank customer information -- Examiners

The types of products sold -- Policies and information policies address the permissibleprocedures should include the criteria the uses of such information for any purposebank will use to select and review each type associated with bank-related retail investmentof product sold or recommended. sales activity. In particular, if the bank intends

For each type of product sold by bank whose certificates of deposit are due toemployees, the bank should identify specific mature to inform them about alternativelaws, regulations, regulatory conditions, and investment products, the policies shouldany other limitation or requirements, including outline steps the bank will take to avoidqualitative considerations, that will expressly confusing customers as to the risks

products meet its customers' needs and

"stock pickers" or that it intends to expand or

should determine that bank customer

to use customer lists to telephone depositors

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associated with nondeposit investmentproducts, including their uninsured nature. In the limited situation in which physical

Banks may also supply customer information product operations from being conducted in alists to a third party vendor. Supplying such distinct area of the bank, a bank has ainformation should only occur, however, after heightened responsibility to ensure thatbank management has evaluated steps the measures are in place to minimize customerthird party is taking to avoid confusing confusion. To minimize customer confusion,customers and after determining such steps the bank should make an officer responsibleare consistent with bank policy. for each of the locations at which the

Bank management also may wish to considerobtaining a legal opinion concerning the The bank also should employ signs and,bank's authority to share customer where possible, separate desks and personnelinformation with third parties. for deposit-taking and investment product

Communications with customers -- Examiners clearly identify themselves by the use ofshould determine whether the bank's policies appropriate methods such as name tags orconsider the need for periodic and ongoing separate business cards. In banks where thecommunications with customers to help them investment program is likely to be lessunderstand their investments and to remind elaborate, the examiner should determine, atcustomers periodically that the products they a minimum, that the bank utilizes the writtenhave purchased are not insured deposits. and oral disclosures described below.Policies should outline customercommunications for the bank during periods In no case should any employee, whileof market stress and assign responsibilities for located in the routine deposit-taking area,such communications. such as the teller window, make general or

Setting and Circumstances ofNondeposit Investment Product SalesBanks should market nondeposit products ina manner that does not mislead or confusecustomers as to the nature of the products ortheir risks. The setting and circumstancessurrounding sales of investment products isfundamental to ensuring that customers canreadily distinguish between nondepositinvestment products and insured deposits.Examiners will determine that bankmanagement has established controls todistinguish retail deposit-taking activities fromthe promotion, sale, and subsequentcustomer relationships related to retailnondeposit investment sales.

To minimize customer confusion, sales of, orrecommendations for, nondeposit investmentproducts on the bank's premises should beconducted in a physical location distinct fromthe area where retail deposits are taken. Signsor other means should be used to distinguishthe investment sales area from the retaildeposit-taking area of the institution.

considerations prevent nondeposit investment

investment product sales will take place.

sales. Investment product salespeople should

specific investment recommendationsregarding nondeposit investment products, oraccept orders for such products, even ifunsolicited. Tellers and other employees whoare not authorized to sell nondepositinvestment products may only refercustomers to individuals who are specificallydesignated and trained to assist customersinterested in the 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 mutual funds are U.S.government guaranteed also are prohibited.

Banks also should recognize that the potentialfor customer confusion may be increased ifthe bank offers nondeposit product namesthat are similar to the bank's name. If thebank offers such nondeposit products withnames similar to the bank's, it should designsales training programs to minimize the risk ofconfusing customers.

In addition, Securities and Exchange

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Commission (SEC) staff have issued an sales program is different, and one set ofopinion that common names between a bank rules may not cover all circumstances orand a mutual fund sold or marketed by or provide all customers with the necessary levelthrough that bank are presumed to be of protection. Before judging a particularmisleading and a violation of the Investment bank's operations, examiners should considerCompany Act of 1940. SEC staff contends, how the various elements of the programhowever, that a common name fund can interact and whether the elements combinedrebut the presumption that a fund's name is mislead or avoid misleading customers.misleading by ensuring that the cover page ofthe prospectus prominently discloses that the The following example illustrates how thefund's shares are not deposits or obligations combination of certain elements canof the bank and are not federally insured. potentially mislead customers:

When examining investment sales programs in at a desk in the lobby. This employee sellsa bank that is selling funds with names similar money market mutual funds and renewsto the bank's, examiners will evaluate the CDs. The employee tells customers aboutsteps that bank management has taken to two products the bank is offering: the FNBavoid confusing customers. The greater the Money Market Fund, an uninsured retailsimilarity between bank and fund names, the nondeposit investment product, and themore closely examiners will scrutinize all FNB Money Market Account, an insuredaspects of a bank's sales program. deposit. This employee may have an

Examiners should criticize sales programs in because the employee gets a commissionwhich fund names are so similar to the bank's for selling a mutual fund but receivesthat even mitigating circumstances are nothing for selling or renewing a deposit.unlikely to eliminate customer confusion. Forexample, it may be acceptable for "First This situation could confuse customers. ToNational Bank" to offer a nondeposit mitigate customer confusion, the bank shouldinvestment product named "First Fund" as ensure that the employee has extensivelong as the bank has implemented sufficient knowledge of the products being sold anddisclosures, training, and other measures to that the employee is thoroughly aware ofmitigate customer confusion. Other names, customer protection issues. When sellinghowever, such as "First Bank Fund" or "First noninsured products, the employee shouldNational Fund" are so similar to a bank's also require customers to sign a new accountname that they are inappropriate because they form acknowledging that the product is notare inherently confusing. insured.

Examiners and bank management should also If space and personnel limitations appear tobe aware that the potential for customer increase the potential for customer confusion,confusion can depend on the context in which examiners should encourage bankthe sales are taking place. For example, it management to require additional training andmay be inappropriate for the First National disclosures, to develop signs and productBank to offer a mutual fund product named names that clearly distinguish among the"FNB Money Market Fund" if First National products being sold, and to assure thatBank were also offering an insured deposit compensation for selling uninsured andproduct named "FNB Money Market insured products is equalized. ExaminersAccount." should expect banks with nondeposit

Overall setting and circumstances -- When operation when this section is issued toreviewing nondeposit investment product initiate actions immediately to conform allsales operations, examiners should not place aspects of the setting and circumstances ofundue weight on a single aspect of the setting the bank's program to these requirements. Inand circumstances of the sale. Each bank's particular, banks should take immediate steps

An employee of the First National Bank sits

incentive to market the uninsured product

investment sales programs already in

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to correct any elements that could confuse The bank should obtain a signed statementcustomers. acknowledging such disclosures from

Disclosures and Advertising

DisclosuresComplete and accurate disclosure must beprovided to avoid customer confusion as towhether a bank-related product is aninvestment product or an insured bankdeposit. Examiners should determine thatbanks selling, advertising, or otherwisemarketing nondeposit investment products toretail customers provide the following productdisclosures conspicuously: The productsoffered (1) are not FDIC insured, (2) are notdeposits or other obligations of the bank orguaranteed by the bank, and (3) involveinvestment risks, including possible loss ofprincipal amount invested.

The minimum disclosures should be providedto the customer:! 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 opened topurchase these products.

! In advertisements and other promotionalmaterials, as described below.

Examiners will determine whether thesedisclosures are featured conspicuously in allwritten or oral sales presentations, advertisingand promotional materials, prospectuses,confirmations, and periodic statements thatinclude the name or the logo of the bank oran affiliate.

Advertisements and brochures also shouldfeature these disclosures at least as large asthe text describing the bank's nondepositinvestment products. The OCC believes thatthese disclosures are conspicuous when theyappear on the cover of a brochure or on thefirst part of relevant written text. A bank'sdisclosures could also be consideredconspicuous if it prints the requireddisclosures in a box or by displaying them inbold type or with bullet points.

customers at the time a retail nondepositinvestment account is opened. For accountsestablished before issuance of this section,the bank should consider obtaining such asigned statement prior to the next sale. If thebank solicits customers by telephone or mail,it should be assured that customers agreeingto purchase nondeposit investment productsreceive the disclosure acknowledgement formwhen they open a new account. A bankshould also request all customers whopreviously opened investment accounts bymail without receiving these writtendisclosures to sign and return a disclosureacknowledgement to the bank.

Confirmations and account statements fornondeposit investment products shouldcontain at least the minimum disclosures ifthe confirmation or account statementcontains the name or logo of the bank or itsaffiliate. If a customer's periodic depositaccount statement includes accountinformation about nondeposit investmentproducts, the bank should clearly separatethat information from information about thedeposit account. The material on thecustomer's periodic deposit account relatingto nondeposit investment products alsoshould begin with the disclosures describedabove as well as the identity of the entityconducting the nondeposit transaction.

Where applicable, examiners should determinethat the bank has made additional disclosuresdescribed in the Interagency Statementregarding affiliate relationships and specificfees and penalties.

Some disclosure obligations may arise fromthe roles a bank or a bank affiliate may play inthe distribution, administration, and/ormanagement processes. For example, a bankshould disclose remuneration received forperforming investment advisory services andadministrative services such as shareholderaccounting. This disclosure obligation may bemet through fee disclosures in a prospectus.If the prospectus does not include such feedisclosures, the bank must make thedisclosures by some other means. State law

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requirements may also govern fee disclosures. "sales" charges and inform readers that a

Additional disclosure responsibilities may the prospectus.occur because of the manner in whichnondeposit investment products are marketed. Examiners should determine that the bankExaminers should determine whether public does not imply in advertising or in written andstatements about the selection of the oral presentations that the bank stands behindproducts a bank offers are reasonable. As an an investment product.example, if management represents tocustomers that it has performed an The bank's marketing department should notindependent analysis of the product selected, be solely responsible for bank-relatedthe examiner should determine that the bank investment sales advertisements. The issuer,has actually done so. Examiners will also or, if a mutual fund, the distributer, mayevaluate management's disclosure to prepare advertisements of specific investmentprospective customers of ratings applicable to products that conform to standards developeda particular product, including the source of by self-regulatory organizations such asthe rating. If ratings are used to promote NASD. Senior bank management shouldcertain products, examiners should expect appoint an officer responsible for ensuringbank management to review whether the bank that bank investment advertisements as wellwill disclose ratings changes and, if so, as advertisements prepared by another partydetermine how such disclosures will occur. that make reference to the bank, or any

Examiners should also determine whether a accurate, not misleading, and include allbank-related sales program includes any required disclosures.written or oral representations to customersconcerning insurance coverage provided byany other entity apart from FDIC, e.g., theSecurities Investor Protection Corporation(SIPC), a state insurance fund, or aninsurance company. If these types ofrepresentations are made, examiners shoulddetermine whether training concerningdifferences in insurance coverage is providedto appropriate personnel. Appropriatepersonnel includes anyone who is likely torespond to customer inquiries or individualsdesignated to sell such products. Examinersshould also determine if written or oralexplanations of the differences in coverageare provided to all customers.

AdvertisingExaminers should assess the procedures the updated periodically.bank uses to ensure that bank-related salesadvertisements are accurate, do not mislead A well-documented suitability inquiry cancustomers about the nature of the product, protect a bank from dissatisfied customersand include required disclosures. For example, who threaten litigation. Such litigation couldclaims about "no fees" or "no charges" are introduce risk to the bank's capital.not accurate if the selling bank collects fees Accordingly, the OCC may view banksfor investment advisory services or collects operating a retail securities business withoutfees for shareholder accounting on the appropriate suitability procedures to beproduct or service being advertised. In this engaging in an unsafe and unsound practice.case a bank could claim that there are no

description of other charges is contained in

advertisement used in bank-related sales, are

SuitabilityConsistent with the Rules of Fair Practice, theOCC expects banks to determine whether aproduct being recommended is an appropriateinvestment for the customer. Banks shouldensure that any salespeople involved in bank-related sales obtain sufficient information fromcustomers to enable the salesperson to makea judgment about the suitability ofrecommendations for particular customers. Ata minimum, suitability inquiries should bemade consistent with the Rules of FairPractice concerning the customer's financialand tax status, investment objectives, andother factors that may be relevant, prior tomaking recommendations to the customer.This information should be documented and

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Many banks use software programs that class of customers, customer complaints,document investor profiles to assist in making sales to first-time and risk-averse investors,suitability judgments. Each profile is based on sales made by high- or low-volumea customer's responses to inquiries as to his salespersons, volatile and new products, andor her financial and relevant personal history. the existence of mutual fund redemptionsThe software program subsequently matches after relatively short holding periods.the customer's investment needs andobjectives to the bank's available products.This type of software is a tool, not asubstitute for professional judgement; itshould not weight bank proprietary productstoo heavily or bank deposits too lightly.

One example of a critical suitabilitydetermination involves sales to elderly bankcustomers. Many of these customers relyupon investments or savings for retirementincome and may consequently demand highyields. They may not, however, have theability to absorb or recover losses. Anondeposit investment salesperson shouldalso be aware that it is especially important tomake a careful suitability recommendationwhen dealing with a surviving spouse who isnot experienced in investment matters.

Examiners should investigate potentialsuitability problems in mutual fund sales whenreviewing "breakpoints" and "letters ofintent." Breakpoints are discounts that areavailable to investors who purchase a largeamount of mutual fund shares in a lump sumor as part of a cumulative 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 a bankofficer has been assigned responsibility forimplementing and/or monitoring the suitabilitysystem. The examination approach shouldfocus on the system the bank has in place tomake suitability inquiries, suitabilityjudgements, and periodic account reviews.Examiners generally should review salespatterns rather than individual sales forsuitability issues. To determine the types ofsales to test for suitability, examiners shouldinvestigate marketing programs that target a

Qualifications and TrainingBanks should implement detailed trainingprograms to ensure that sales personnel havethorough product knowledge (as opposed tosimple sales training for a product) andunderstand customer protection requirements.Examiners should assess the process the bankuses to ensure that sales personnel areproperly qualified and adequately trained tosell all bank-related nondeposit investmentproducts. If bank personnel sell or recommendsecurities, the training should be substantivelyequivalent to that required for personnelqualified to sell securities as registeredrepresentatives. Securities industry training isavailable in most metropolitan areas.

Examiners also should determine that thebank's audit and compliance personnel andpersons with supervisory responsibilities areproperly trained and knowledgeable.

A bank's hiring practices and training planshould be designed around the complexityand risks of the particular investmentproducts being offered. While it may beappropriate to have a banking generalist withno securities industry background sell moneymarket mutual funds, it could be inappropriateto allow 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 industry customerprotection and control systems and have anadequate knowledge of the products beingoffered. Since they may not be familiar withgeneral banking regulations and may notunderstand the needs of bank customers,banks should also ensure that theseindividuals are instructed as to the specializedobligations of selling investment products ina retail banking environment. Examinersshould expect management to check with

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securities regulators to determine if potential nondeposit investment product sales and CDbank sales employees with previous securities renewal functions. Alternatively, if employeesindustry experience have a disciplinary are permitted to offer both deposits andhistory. nondeposit investment products, a bank could

Banks engaging in lower volume mutual fund employee for renewing maturing deposits asand annuity sales frequently train existing well as for selling nondeposit investmentbank employees to sell investment products. products. Examiners should discuss with bankExaminers should determine that bank management where appropriate the methodsmanagement is satisfied that these individuals used to avoid possible conflicts of interesthave acquired "product knowledge," and potentially arising from the bank'sthoroughly understand the need to safeguard compensation plan.the customers' interests. More specialized"product knowledge" training is generally To investigate whether incentiveprovided by the marketing division of a compensation schemes could inducemutual fund sponsor or another third party salespersons to recommend products withvendor. Bank staff should also receive higher commissions over a more suitablecustomer protection and compliance training. option, examiners should look to customer

Examiners should determine whether a bank to individual sales. For example, an examinerofficer has been assigned responsibility for can look for instances in which sales for aensuring that adequate training is provided to particular product increased after changes tobank staff, and for reviewing the hiring and an incentive compensation system.training practices of a third party vendor.

CompensationIncentive compensation systems, which arestandard in the securities and insurancebusinesses, are becoming increasinglycommon in commercial banking. Personnelwho are authorized to sell nondepositinvestment products may receive incentivecompensation, such as commissions, fortransactions entered into by customers.However, incentive compensation programsmust not be structured in such a way as toresult in unsuitable recommendations or salesbeing made to customers.

An improperly designed compensation systemcan provide a bank employee with theincentive to place his or her owncompensation interests above the interests ofbank customers. Examiners should assess thesteps management has taken to ensure thatcompensation programs do not operate as anincentive for salespeople to make unsuitablerecommendations or sales to customers.

One way to avoid having the compensationsystem drive the recommendation towardmutual funds and away from certificate ofdeposit renewals would be to separate the

reduce the temptation by compensating the

complaints and to sales patterns rather than

Examiners also should expect a bank toincrease its supervision of sales programs asit increases its incentive compensation.Examiners should be critical of supervisionthat does not take into account the possibilitythat recommendations for purchases ofnondeposit investment products could beinfluenced by the incentive compensationscheme.

If the overall setting and circumstances of abank's investment sales program appears tobe only marginally satisfactory, examinersshould regard higher incentive compensationon certain investment products and lowercompensation on deposits and otherinvestment products as having the potentialfor causing serious problems. In this case thecompensation system itself should justify anincrease in the level of bank managementsupervision. If supervision is not adequate,the examiner should criticize thecompensation system and other objectionablefactors in the setting and circumstance of thesale.

Bank supervisory employees who review andapprove individual sales, accept newaccounts, and review established customer

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accounts should not receive incentive purchases and retention of bank proprietarycompensation based on the profitability of products for fiduciary accounts are in accordindividual trades or accounts that are subject with sound fiduciary principles. This requiresto their review. Similarly, department auditors that even if specific authority exists foror compliance personnel should not participate fiduciary accounts to purchase or retain bank-in incentive compensation programs that are advised or bank private label mutual funds,based directly on the success of sales efforts the assets must be appropriate for eachnor should they report to a manager who account. The investment must be consistentreceives this type of incentive compensation. with the purpose for which each account wasIn addition, bank management should not rely created, and suitable for the beneficial intereston third party audit and control systems if holders of each account. This requirementthat vendor's control personnel receive exists as to purchases for individual accounts,transaction-based incentive compensation. and for conversions of collective investment

Bank employees, including tellers, may receivea one-time nominal fee of a fixed dollar Twelve CFR 9.7 requires banks to conductamount for each customer referred for initial and annual reviews of each fiduciarynondeposit investment products. The account as well as a separate review of allpayment of this referral fee should not depend securities by issuer to ensure compliance withon whether the referral results in a these requirements. These reviews include:transaction. ! A documented review of each account

Fiduciary AccountsPursuant to 12 CFR 9.11(d), examiners willreview the investments held by national banksas fiduciary to determine whether suchinvestments are in accordance with law, 12CFR 9, and sound fiduciary principles. In sodoing, they will ensure that the bank hascomplied with all applicable state and federalrestrictions on investment transactionsinvolving the bank's fiduciary accounts.

Under 12 CFR 9.12, national bank fiduciariesmay not invest funds held as fiduciary in thestock of organizations with which there existssuch a connection as may affect the exerciseof the best judgment of the bank in acquiringthe stock, unless there exists specificauthority for such an investment in thegoverning instrument, local law, a court orderor through consents from all beneficiaries. Asto accounts subject to the EmployeeRetirement Income Security Act of 1974,such investments must be within theauthority of that Act. These principles govern Banks must maintain compliance programspurchases of a bank's proprietary products, capable of verifying compliance with thesuch as bank-advised mutual funds and guidelines specified in the Interagencyprivate label mutual funds for fiduciary Statement and with any other applicableaccounts. requirements. Banks should perform

In addition, pursuant to 12 CFR 9.11(d), independently of investment product salesexaminers will determine that fiduciary and management. At a minimum, the

funds to bank-advised mutual funds.

to determine that the assets of thataccount, including any proprietaryproducts, meet the investmentobjectives of the account. In structuringthe account portfolio, the fiduciary mustconsider the provisions of the documentestablishing the account. The reviewmust also take into account the needs ofthe beneficial interest holders. Thisreview should address the issues setforth in the Comptroller's Handbook forFiduciary Activities, "PortfolioManagement."

! A documented annual review of allassets by issuer, including proprietaryproducts. This review should considerthe quality of fund management, feestructure, risk diversification andanticipated rates of return. It should alsoaddress the considerations set forth inthe Comptroller's Handbook forFiduciary Activities, "Investments."

Compliance Program

nondeposit investment compliance programs

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compliance function should include a system review periodically customer responses toto monitor customer complaints and to review suitability inquiries and to compare thesecustomer accounts periodically to detect and responses to the type and volume of accountprevent abusive practices. activity to determine whether the activity in

Examiners reviewing the compliance is unusual relative to the customer's statedoperations of a bank offering a variety of objectives and risk tolerance, or if accountretail investment products should ensure that activity is brisk relative to the size of athe bank has comprehensive self-regulatory customer's investment or past practices,policies and that it is conducting an ongoing management should make follow-up inquiriescomparison of the bank's investment sales to determine if the activity serves the bestpractices with its stated investment policy. In interests of the customer.banks with a less elaborate investment salesprogram, where an internal auditing group If examinations or routine oversight by bankmay perform all of the bank's compliance management indicates that suitabilityfunctions, the examiner should ensure that problems may exist, bank management isthese auditors are periodically comparing sales expected to conduct its own review of allpractices with policy. affected accounts and to institute corrective

Individuals performing the audit or compliance may have been disadvantaged, correctiveof the bank's investment program should be actions should be designed on a case-by-casequalified and should have the necessary basis and may include full explanations toexperience to perform the assigned tasks. customers and, where appropriate, offers toCompliance personnel should also engage in rescind trades.ongoing training to keep abreast of emergingdevelopments in banking and securities laws Customer complaints are an indication ofand regulations. potential problems that warrant a prompt

Banks can establish independence of audit or bank to assign a bank officer who iscompliance personnel if such personnel independent of the sales force thedetermine the scope, frequency, and depth of responsibility for approving the resolution oftheir own reviews; report their findings complaints or reviewing the resolution ofdirectly to the board of directors or an complaints by a third party vendor. Theappropriate committee of the board; have examiner should evaluate the system fortheir performance evaluated by persons assuring that all complaints (written and oral)independent of the investment product sales receive management's attention by reviewingfunction; and receive compensation that is not the bank's audit of the complaint resolutionconnected to the success of investment system.product sales.

Bank compliance programs should be modeled programs also often use automated exceptionafter those in the securities business where it reporting systems to flag potential problemsis customary for compliance personnel to before customers complain. Such systemsconduct regular and frequent customer monitor product sales and the performance ofaccount reviews in order to detect and salespersons. If the bank has such systems inprevent abuses. The extent and frequency of place, and if the reports show significantcustomer account supervision should be volumes of mutual fund redemptions afterdictated by the aggressiveness of the sales short holding periods, examiners shouldprogram and the riskiness of products being review the steps management has taken tooffered. investigate whether the product is being sold

Examiners should expect the bank to assignindividuals independent of the sales force to If early redemptions are restricted to one

an account is appropriate. If account activity

actions. If it is determined that customers

account review. Examiners should expect the

Managers of high-volume investment sales

properly.

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salesperson or one branch, management can that may arise at a later date.reasonably conclude that the problem islocalized. However, early redemptions "Negative consent" letters (e.g., noticesoccurring throughout the sales network may informing customers that unless they object,indicate that something is wrong with the the bank assumes the customer understandsproduct itself or with the training provided to and does not object to the transactions) maysalespeople. Similarly, if reports indicate that be a useful element in a compliance programa salesperson is selling one type of product but should not be the sole means of verifyingalmost exclusively, management may need to that customers understand nondepositreview that individual's performance or investment product transactions and thetraining. bank's role in the process.

Ultimately, the way for bank management to Examiners should determine whether a bankassure itself that the securities salespersons officer has been assigned the responsibilityare providing the required disclosures and for assuring that the bank adequatelymaking suitable recommendations to monitors the nondeposit investment accountscustomers is to "test" the sales program. of customers. Examiners should alsoEffective "tests" can be conducted in several determine whether the officer has developedways. Larger banks sometimes employ or is developing a system to monitor the"testers" who pose as prospective customers customer account reviews of outside vendorsand test the sales presentations for a variety operating bank-related sales programs.of issues including adherence to customerprotection standards. Many other well-managed banks (of all sizes) have institutedfollow-up programs to verify that theircustomers understood their investmenttransactions. A bank manager, who isindependent of the sales force, may telephonecustomers a few days after an investmentaccount is opened or an unusual transactionhas taken place. The manager will determineif the customer understands what he or shehas purchased; understands the risks,including the uninsured nature of the product;understands the bank's role in thetransaction; and can generally confirmresponses to a suitability inquiry previouslyprovided.

A bank officer usually can determine if acustomer understands an investment byasking the customer to describe its generalfeatures. The customer should be able todescribe how the product works and its risksrather than simply recite what he or shehopes to gain from the particular investment.Managers usually also determine if thecustomer is satisfied with the product andservice or has any problems or suggestionsfor improving service. If a bank institutes atelephone follow-up program, it shouldmaintain a record of conversations withcustomers to resolve problems or disputes

Oversight of Third Party VendorsWhen a bank uses a third party vendor to sellnondeposit investment products, the bank'sboard of directors must adopt a written policyaddressing the scope of the activities of thethird party, as well as the procedures thebank intends to use for monitoring the thirdparty's compliance with the InteragencyStatement.

To select the third party vendor and monitorthe ongoing acceptability of the vendor, bankmanagement usually reviews the vendor'sexperience in the business and the vendor'sfinancial statement. Bank management alsousually contacts other banks with which thevendor has done business for references.Examiners should also expect that bankmanagement checked with the vendor'sregulator before it entered into an agreementwith the vendor and that management hascontinued to review reports furnished to thevendor by its regulators).

Bank management should enter into a writtenagreement with a third party vendor that hasbeen approved by the bank's board ofdirectors before the vendor is permitted tooffer nondeposit investment products to thebank's customers. The agreement shouldoutline the duties and responsibilities of each

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party and should include a description of all of party vendor, bank management also shouldthe activities the third party is permitted to be satisfied that the vendor uses a productengage in on the bank's premises. The selection process similar to the one outlinedagreement also should set forth terms for the below. Banks relying on a third party vendoruse of the bank's space, personnel, and to select products also should understand andequipment as well as compensation agree with the vendor's method of analysisarrangements for personnel of the bank and and document its concurrence with thatthe third party. The agreement also should: method. Examiners should determine whether! Specify that the third party will comply management has understood and concurred.

with all applicable laws and regulations Bank management should periodicallyand will act consistently with the investigate the vendor's product selectionprovisions of this temporary insert, process to ensure that it continues to beespecially the provisions relating to appropriate to the bank's customer mix.customer disclosures, Examiners also should determine whether

! Authorize the bank to monitor the third bank management understands and agreesparty by periodically reviewing and with contingency plans developed by the thirdverifying that the third party and its party vendor and the product issuer tosales representatives are complying with respond to customer orders during unusualits agreement with the bank, with all surges in redemptions.applicable laws and regulations, and withthe provisions of this temporary insert, To fulfill its oversight responsibilities, it is

! Specify the type, scope, and frequency expected that bank management will receiveof reports the third party is to furnish to various reports from the third party vendorbank management to permit bank and have access to the vendor's appropriatemanagement to fulfill its oversight records. The reports received will vary withresponsibilities, the scope of the sales program and should be

! Authorize the institution and the OCC to tailored to the needs of the institution. Thehave access to appropriate records of reports should always include a list of allthe third party, customer complaints and their resolution.

! Require the third party to agree to Other reports that may facilitate bankindemnify the bank for any liability that management's oversight role, could include:resulted from third party investment ! A periodic listing of all new accountproduct sales program actions, openings and descriptions of the initial

! Set forth the training which the bank trades;expects its employees and third party ! A list of significant or unusual (for thepersonnel to possess, and customer) individual sales during a

! Provide for written employment reporting period;contracts between the bank and the ! Sales reports by product, salesperson,third party vendor's employees. and location during a reporting period;

Examiners will review the agreement to ! Reports of internal compliance reviewsdetermine that it specifies that the third party of customer accounts originated at thevendor will comply with all applicable bank and reports furnished to the thirdrequirements contained in the Interagency party vendor by its regulator(s) on atStatement. Examiners also will review the least an annual basis.agreement to determine if it includesprovisions regarding bank oversight and Bank management must monitor complianceexaminer access to appropriate records. It is by third party vendors on an ongoing basis.expected that compliance with the agreement Senior bank managers will be expected towill be periodically monitored by the ensure that specific individuals employed byinstitution's senior management. the bank and by the third party vendor are

Before entering into an agreement with a third bank's investment sales policy. The degree of

and

responsible for each activity outlined in the

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bank management's involvement should be required, most well-run bank investment salesdictated by the types of products being programs limit the number of products offeredoffered, the volume of sales, the nature of so that customers and salespersons will notcustomers' complaints, and the effectiveness be presented with an overwhelming numberof the third party vendor's customer of choices. Limitations based on productprotection systems. quality may also make it easier for sales

Senior bank management also should appoint customers from inappropriate products.an officer responsible for ensuring that bankinvestment advertisements as well as As a general practice, bank investmentadvertisements prepared by another party that programs offer at least one type of moneyrefer to the bank, or any advertisement used market mutual fund for customers who arein bank-related sales, are accurate, not interested in liquidity. In addition, most banksmisleading, and include all required offer a U.S. government bond fund fordisclosures. In addition, any advertising or customers who stress safety and steadypromotional material -- prepared by or on income, an equity fund for customersbehalf of a third party vendor -- should clearly interested in capital growth, and a tax-exemptidentify the company selling the nondeposit bond fund for customers who wish to avoidinvestment product and should not suggest taxes on investment earnings.that the depository institution is the seller.

Examiner access to the records of third party managers should review the fund'svendors should be governed by preliminary performance over an extended period of time.examination findings. When such findings Most bank managers prefer to avoid mutualmake it clear that bank management has funds with volatile records. Management'sdischarged its oversight responsibility by selection of a family of funds should not bereviewing and responding appropriately to based on the performance of one particularthird party reports, only a few customer fund; each fund selection should stand on itscomplaints have been filed against the vendor, own merits.and the vendor's reports are timely,sufficiently detailed, and prepared by someone Management's selection of investmentindependent of the vendor's sales force, products usually begins with an evaluation ofexaminer access to third party records should the stability of asset values over time and angenerally be limited to the reports furnished to assessment of yields to investors.management by the vendor. Management also compares the performance

Product SelectionThis section describes in general terms themethods that well-managed banks use toselect specific nondeposit investmentproducts and to determine that such productscontinue to be acceptable to the bank'scustomer mix. This information is provided tohelp examiners understand and review theprocess used by well-managed banks to makethis determination.

Bank management should determine thespecific laws, regulations, regulatoryconditions or other limitations orrequirements, including qualitativeconsiderations, that will govern the sale ofproducts to be offered. Although not

managers to shield certain classes of

When deciding which funds to offer,

of other funds with similar objectives over thesame period(s). Specialized ratings services(such as Morningstar or Lipper) or rankingsby analytical services are usually regarded asnecessary but secondary considerations.

Management also considers the fund's trackrecord in terms of both risk and reward.Management analyzes the fund's net assetvalue versus total return, its management oroperating expenses, the turnover within thefund's portfolio, and capital gains and othersources of income. Other key considerationsinclude the composition of the portfolio andconcentrations in types of holdings, sectorweights, and, in the case of equity funds, thepercentage of ownership represented byindividual issues.

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Management also evaluates important non- consider the performance and composition ofstatistical factors such as the continuity, the portfolio that is dedicated to the annuitytenure, and demonstrated talent of the fund's holders.management. They also may consider factorssuch as the quality of a mutual fund's Selection analysis for fixed-rate annuitiesoperational and marketing support. differs from variable-rate annuities. Since

The bank itself, and not another entity's insurance companies, the risks associatedmarketing department, should select the funds with them relate to the issuer's ability toto be offered. Independent committees and honor the terms of the annuity contract.qualified analysts should make the final Accordingly, the safety of an annuity dependsselections, not a sales manager whose view upon the financial standing of the firm thatof the commission structure may affect this issues it and the selection analysis involves anjudgment. assessment of the quality and diversification

If the bank uses outside consultants to help bonds, mortgage-backed securities, andselect a mutual fund, bank management problem real estate loans, as well as theshould determine whether the consultant continuity of management.receives compensation from mutual funds ormutual fund wholesalers. If the analysis is Because it is difficult to independently analyzeperformed by another party, such as a insurance companies, ratings provided byclearing broker or third party vendor, bank rating agencies such as A.M. Best, Standardmanagement should understand and agree & Poor's, Duff & Phelps, Moody's and Weisswith the method of analysis and should Research play a part in annuity analysis. Ifdocument the bank's concurrence. bank management relies significantly on such

Regardless of who selects the mutual fund however, examiners should expect that theproducts, bank management will be expected issuer selected by the bank has received topto consider the issuer's contingency plans for ratings from most of the ratings services.handling unusual surges in redemptions at thetime such products are being considered. When analyzing annuities, management alsoSuch contingency plans normally include should recognize that an issuing insuranceemergency staffing, communications, and company can, in certain circumstances, sell oroperational programs that are based on simply transfer the annuity contract tovarious market scenarios. another insurance company, thereby

Bank management should compare these the annuity. Annuity owners are generally,contingency plans to the expected needs of but not always, asked to consent to thisbank customers during periods of stress. transfer. A bank selling annuities should

Finally, once the initial selection process is its product selection analysis. At a minimum,complete, bank management should conduct the bank should disclose this possibility toongoing reviews to assure that the products prospective customers.remain acceptable in light of the bank'sobjectives and customer's needs.

Selection of annuity products is conducted inthe same manner. A variable-rate annuity, ahybrid form of investment that containselements of mutual funds and insurance,could be characterized as a mutual fundoperated by an insurance company. During

product selection, bank management should

fixed-rate annuities are obligations of

of the company's assets, its holdings of junk

ratings rather than on its own analysis,

extinguishing its obligation to the purchaser of

consider the possibility of such a transfer in

Interagency Statement on RetailSales on Nondeposit InvestmentProducts

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

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Interagency Statement on RetailSales on Nondeposit InvestmentProductsFebruary 15, 1994

Introduction

Recently many insured depository institutionshave expanded their activities inrecommending or selling to retail customersnondeposit investment products, such asmutual funds and annuities. Many depositoryinstitutions are providing these services at theretail level, directly or through various typesof arrangements with third parties.

Sales activities for nondeposit investmentproducts should ensure that customers forthese products are clearly and fully informedof the nature and risks associated with theseproducts. In particular, where nondepositinvestment products are recommended or soldto retail customers, depository institutionsshould ensure that customers are fullyinformed that the products:! Are not insured by the FDIC;! Are not deposits or other obligations of

the institution and are not guaranteed bythe institution; and,

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

Moreover, sales activities involving theseinvestment products should be designed tominimize the possibility of customer confusionand to safeguard the institution from liabilityunder the applicable anti-fraud provisions ofthe federal securities laws, which, amongother things, prohibit materially misleading orinaccurate representations in connection withthe sale of securities.

The four federal banking agencies -- the Boardof Governors of the Federal Reserve System,the Federal Deposit Insurance Corporation,the Office of the Comptroller of the Currency,and the Office of Thrift Supervision -- areissuing this Statement to provide uniformguidance to depository institutions engagingin these activities.

(Note: Each of the four banking agencies hasin the past issued guidelines addressingvarious aspects of the retail sale ofnondeposit investment products. OCCBanking Circular 274 (July 1 9, 1993); FDICSupervisory Statement FIL-71-93 (October 8,1993); Federal Reserve Letters SR 93-35(June 17, 1993), and SR 91-14 (June 6,1991); OTS Thrift Bulletin 23-1 (September7, 1993). This Statement is intended toconsolidate and make uniform the guidancecontained in the various existing statementsof each of the agencies, all of which aresuperseded by this Statement. Some of thebanking agencies have adopted additionalguidelines covering the sale of certain specifictypes of instruments by depositoryinstitutions, i.e., obligations of the institutionitself or of an affiliate of the institution. Theseguidelines remain in effect except whereclearly inapplicable.)

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 theinstitution (see Note, below, addressingwhich institutions are covered),occurring on the premises of theinstitution (including telephone sales orrecommendations by employees or fromthe institution's premises and sales orrecommendations initiated by mail fromits premises); and

! Sales resulting from a referral of retailcustomers by the institution to a thirdparty when the depository institutionreceives a benefit for the referral.

(Note: This Statement does not apply to thesubsidiaries of insured state nonmemberbanks, which are subject to separateprovisions, contained in 12 CFR 337.4,relating to securities activities. For OTS-regulated institutions that conduct sales ofnondeposit investment products through asubsidiary, these guidelines apply to thesubsidiary. 12 CFR 545.74 also applies tosuch sales. Branches and agencies of U.S.



foreign banks should follow these guidelines investment product sales program.with respect to their nondeposit investmentsales programs.) The institution's policies and procedures

These guidelines generally do not apply to the ! Compliance procedures. The proceduressale of nondeposit investment products to for ensuring compliance with applicablenon-retail customers, such as sales to laws and regulations and consistencyfiduciary accounts administered by an with the provisions of this Statement.institution. (Note: Restrictions on a national ! Supervision of personnel involved inbank's use as fiduciary of the bank's sales. A designation by senior managersbrokerage service or other entity with which of specific individuals to exercisethe bank has a conflict of interest, including supervisory responsibility for eachpurchases of the bank's proprietary and other activity outlined in the institution'sproducts, are set out in 12 CFR 9.12. Similar policies and procedures.restrictions on transactions between funds ! Types of products sold. The criteriaheld by a federal savings association as governing the selection and review offiduciary and any person or organization with each type of product sold orwhom there exists an interest that might recommended.affect the best judgment of the association ! Permissible use of customer information.acting in its fiduciary capacity are set out in The procedures for the use of12 CFR 550.10. However, as part of its information regarding the institution'sfiduciary responsibility, an institution should customers for any purpose in connectiontake appropriate steps to avoid potential with the retail sale of nondepositcustomer confusion when providing investment products.nondeposit investment products to the ! Designation of employees to sellinstitution's fiduciary customers.) investment products. A description of

Adoption of Policies and Procedures

Program Management. A depositoryinstitution involved in the activities describedabove for the sale of nondeposit investmentproducts to its retail customers should adopta written statement that addresses the risksassociated with the sales program andcontains a summary of policies andprocedures outlining the features of theinstitution's program and addressing, at aminimum, the concerns described in thisStatement. The written statement shouldaddress the scope of activities of any thirdparty involved, as well as the procedures formonitoring compliance by third parties inaccordance with the guidelines below. Thescope and level of detail of the statementshould appropriately reflect the level of theinstitution's involvement in the sale orrecommendation of nondeposit investmentproducts. The institution's statement shouldbe adopted and reviewed periodically by itsboard of directors. Depository institutions areencouraged to consult with legal counsel withregard to the implementation of a nondeposit

should include the following:

the responsibilities of those personnelauthorized to sell nondeposit investmentproducts and of other personnel whomay have contact with retail customersconcerning the sales program, and adescription of any appropriate andinappropriate referral activities and thetraining requirements and compensationarrangements for each class ofpersonnel.

Arrangements with Third Parties. If adepository institution directly or indirectly,including through a subsidiary or servicecorporation, engages in activities as describedabove under which a third party sells orrecommends nondeposit investment products,the institution should, prior to entering intothe arrangement, 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. Compliancewith the agreement should be periodicallymonitored by the institution's seniormanagement. At a minimum, the writtenagreement should:



! Describe the duties and responsibilities with respect to the sale or recommendation ofof each party, including a description of these products should, at a minimum, specifypermissible activities by the third party that the product is:on the institution's premises, terms as ! Not insured by the FDIC;to the use of the institution's space, ! Not a deposit or other obligation of, orpersonnel, and equipment, and guaranteed by, the depositorycompensation arrangements for institution;personnel of the institution and the thirdparty. ! Subject to investment risks, including

! Specify that the third party will comply possible loss of the principal amountwith all applicable laws and regulations, invested.and will act consistently with theprovisions of this Statement and, in The written disclosures described aboveparticular, with the provisions relating to should be conspicuous and presented in acustomer disclosures. clear and concise manner. Depository

! Authorize the institution to monitor the institutions may provide any additionalthird party and periodically review and disclosures that further clarify the risksverify that the third party and its sales involved with particular nondepositrepresentatives are complying with its investment products.agreement with the institution.

! Authorize the institution and the Timing of Disclosure. The minimumappropriate banking agency to have disclosures should be provided to theaccess to such records of the third party customer:as are necessary or appropriate to ! Orally during any sales presentation,evaluate such compliance. ! Orally when investment advice

! Require the third party to indemnify the concerning nondeposit investmentinstitution for potential liability resulting products is provided,from actions of the third party with ! Sales or recommendations made by bankregard to the investment product sales Orally and in writing prior to or at theprogram. time an investment account is opened to

! Provide for written employment purchase these products, andcontracts, satisfactory to the institution, ! In advertisements and other promotionalfor personnel who are employees of materials, as described below.both the institution and the third party.

General Guidelines

1. Disclosures and AdvertisingThe banking agencies believe thatrecommending or selling nondepositinvestment products to retail customersshould occur in a manner that assures thatthe products are clearly differentiated frominsured deposits. Conspicuous and easy tocomprehend disclosures concerning the natureof nondeposit investment products and therisk inherent in investing in these products areone of the most important ways of ensuringthat the differences between nondepositproducts and insured deposits areunderstood.

Content and Form of Disclosure. Disclosures

A statement, signed by the customer shouldbe obtained at the time such an account isopened, acknowledging that the customer hasreceived and understands the disclosures. Forinvestment accounts established prior to theissuance of these guidelines, the institutionshould consider obtaining such a signedstatement at the time of the next transaction.

Confirmations and account statements forsuch products should contain at least theminimum disclosures if the confirmations oraccount statements contain the name or thelogo of the depository institution or anaffiliate. (Note: These disclosures should bemade in addition to any other confirmationdisclosures that are required by law orregulation, e.g., 12 CFR 12, 208.8(k)(3),and344.) If a customer's periodic deposit



account statement includes account e.g., the Securities Investor Protectioninformation concerning the customer's Corporation (SIPC), a state insurance fund, ornondeposit investment products, the a private insurance company, then clear andinformation concerning these products should accurate written or oral explanations of thebe clearly separate from the information coverage must also be provided to customersconcerning the deposit account, and should when the representations concerningbe introduced with the minimum disclosures insurance coverage are made, in order toand the identity of the entity conducting the minimize possible confusion with FDICnondeposit transaction. insurance. Such representations should not

Advertisements and Other Promotional insurance coverage is the same as or similarMaterial. Advertisements and other to FDIC insurance.promotional and sales material, written orotherwise, about nondeposit investment Because of the possibility of customerproducts sold to retail customers should confusion, a nondeposit investment productconspicuously include at least the minimum must not have a name that is identical to thedisclosures discussed above and must not name of the depository institution.suggest or convey any inaccurate or Recommending or selling a nondepositmisleading impression about the nature of the investment product with a name similar toproduct or its lack of FDIC insurance. The that of the depository institution should onlyminimum disclosures should also be occur pursuant to a sales program designedemphasized in telemarketing contacts. Any to minimize the risk of customer confusion.third party advertising or promotional material The institution should take appropriate stepsshould clearly identify the company selling the to assure that the issuer of the product hasnondeposit investment product and should complied with any applicable requirementsnot suggest that the depository institution is established by the Securities and Exchangethe seller. If brochures, signs, or other Commission regarding the use of similarwritten material contain information about names.both FDIC-insured deposits and nondepositinvestment products, these materials should 2. Setting and Circumstancesclearly segregate information about Selling or recommending nondepositnondeposit investment products from the investment products on the premises of ainformation about deposits. depository institution may give the impression

Additional Disclosures. Where applicable, the obligations of the depository institution. Todepository institution should disclose the minimize customer confusion with depositexistence of an advisory or other material products, sales or recommendations ofrelationship between the institution or an nondeposit investment products on theaffiliate of the institution and an investment premises of a depository institution should becompany whose shares are sold by the conducted in a physical location distinct frominstitution and any material relationship the area where retail deposits are taken. Signsbetween the institution and an affiliate or other means should be used to distinguishinvolved in providing nondeposit investment the investment sales area from the retailproducts. In addition, where applicable, the deposit-taking area of the institution.existence of any fees, penalties, or surrender However, in the limited situation wherecharges should be disclosed. These additional physical considerations prevent sales ofdisclosures should be made prior to or at the nondeposit products from being conducted intime an investment account is opened to a distinct area, the institution has apurchase these products. heightened responsibility to ensure appropriate

If sales activities include any written or oral confusion.representations concerning insurance coverageprovided by any entity other than the FDIC, In no case, however, should tellers and other

suggest or imply that any alternative

that the products are FDIC-insured or are

measures are in place to minimize customer



employees, while located in the routine Depository institutions should investigate thedeposit-taking area, such as the teller win- backgrounds of employees hired for theirdow, make general or specific investment nondeposit investment products salesrecommendations regarding nondeposit in- programs, including checking for possiblevestment products, qualify a customer as disciplinary actions by securities and othereligible to purchase such products, or accept regulators if the employees have previousorders for such products, even if unsolicited. investment industry experience.Tellers and other employees who are notauthorized to sell nondeposit investment 4. Suitability and Sales Practicesproducts may refer customers to individuals Depository institution personnel involved inwho are specifically designated and trained to selling nondeposit investment products mustassist customers interested in the purchase of adhere to fair and reasonable sales practicessuch products. and be subject to effective management and

3. Qualifications and Training practices. In this regard, if depositoryThe depository institution should ensure that institution personnel recommend nondepositits personnel who are authorized to sell investment products to customers, theynondeposit investment products or to provide should have reasonable grounds for believinginvestment advice with respect to such that the specific product recommended isproducts are adequately trained with regard to suitable for the particular customer on thethe specific products being sold or basis of information disclosed by therecommended. Training should not be limited customer. Personnel should make reasonableto sales methods, but should impart a efforts to obtain information directly from thethorough knowledge of the products involved, customer regarding, at a minimum, theof applicable legal restrictions, and of customer's financial and tax status,customer protection requirements. If investment objectives, and other informationdepository institution personnel sell or that may be useful or reasonable in makingrecommend securities, the training should be investment recommendations to thatthe substantive equivalent of that required for customer. This information should bepersonnel qualified to sell securities as documented and updated periodically.registered representatives. (Note: Savingsassociations are not exempt from the 5. Compensationdefinitions of "broker" and "dealer" in Depository institution employees, includingSections 3(a)(4) and 3(a)(5) of the Securities tellers, may receive a one-time nominal fee ofExchange Act of 1934; therefore, all a fixed dollar amount for each customersecurities sales personnel in savings referral for nondeposit investment products.associations must be registered The payment of this referral fee should notrepresentatives.) depend on whether the referral results in a

Depository institution personnel withsupervisory responsibilities should receive Personnel who are authorized to selltraining appropriate to that position. Training nondeposit investment products may receiveshould also be provided to employees of the incentive compensation, such asdepository institution who have direct contact commissions, for transactions entered into bywith customers to ensure a basic customers. However, incentive compensationunderstanding of the institution's sales programs must not be structured in such aactivities and the policy of limiting the way as to result in unsuitableinvolvement of employees who are not recommendations or sales being made toauthorized to sell investment products to customers.customer referrals. Training should beupdated periodically and should occur on an Depository institution compliance and auditongoing basis. personnel should not receive incentive

compliance reviews with regard to such

transaction.

compensation directly related to results of the



nondeposit investment sales program.

6. Compliance submitted to:Depository institutions should develop and FRB -- Division of Banking Supervision andimplement policies and procedures to ensure Regulation, Securitiesthat nondeposit investment product sales Regulation Section, (202) 452-2781; Legalactivities are conducted in compliance with Division,applicable laws and regulations, the institu- (202) 452-2246.tion's internal policies and procedures, and ina manner consistent with this Statement. FDIC -- Office of Policy, Division of Supervi-Compliance procedures should identify any sion,potential conflicts of interest and how such (202) 898-6759; Regulation and Legislationconflicts should be addressed. The compliance Section,procedures should also provide for a system Legal Division (202) 898-3796.to monitor customer complaints and theirresolution. Where applicable, compliance OCC -- Office of the Chief National Bankprocedures also should call for verification Examiner, Capitalthat third party sales are being conducted in Markets Group, (202) 874-5070.a manner consistent with the governingagreement with the depository institution. OTS -- Office of Supervision Policy, (202)

The compliance function should be conducted and Securities Division, (202) 906-7289.independently of nondeposit investmentproduct sales and management activities. Effective date: February 15, 1994Compliance personnel should determine thescope and frequency of their own review, andfindings of compliance reviews should beperiodically reported directly to the institu-tion's board of directors, or to a designatedcommittee of the board. Appropriate proce-dures for the nondeposit investment productprograms should also be incorporated into theinstitution's audit program.

Supervision by Banking Agencies

The federal banking agencies will continue toreview a depository institution's policies andprocedures governing recommendations andsales of nondeposit investment products, aswell as management's implementation andcompliance with such policies and all otherapplicable requirements. The banking agencieswill monitor compliance with the institution'spolicies and procedures by third parties thatparticipate in the sale of these products. Thefailure of a depository institution to establishand observe appropriate policies andprocedures consistent with this Statement inconnection with sales activities involvingnondeposit investment products will besubject to criticism and appropriate correctiveaction.

Questions on the Statement may be

906-5740; Corporate

Retail Nondeposit Investment SalesExamination Objectives Section 413.2


1. To determine if the bank has taken 3. To ensure that bank management oper-reasonable steps to ensure that retail ates the bank's nondeposit investmentcustomers can distinguish between sales program in a safe and soundinsured deposits and uninsured manner and complies with OCC guide-nondeposit investment products. lines, interagency statements, and all

2. To determine if the banks' policies,procedures, and practices provide for 4. To initiate corrective action when thean adequate self-regulatory system bank's policies, practices, procedures,that is designed to ensure customer or managerial controls are deficient orprotections in all aspects of the sales when the bank has failed to complyprograms. with laws, rules, regulations or OCC

applicable laws and regulations.

guidelines.

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Retail Nondeposit Investment SalesExamination Procedures Section 413.3


All examiners should be familiar with allexamination procedures, and should completeany steps they think are necessary.However, there are some reasonable stand-ards for which procedures form the basis ofreview of certain types of operations:

For a community bank that uses an indepen-dent third party vendor to operate its retailsales program, examiners may find itadequate to complete only the Third PartyVendor section of the ICQs and the relatedexamination procedures.

For a bank that operates its own sales pro-gram or operates through a joint venture oran affiliated broker/dealer, an examiner willusually find it necessary to complete allsections at the first examination. At subse-quent examinations of sales programs with noapparent weaknesses, completion of only thecore examination procedures (indicated in boldtype) may be adequate. Any concern thatsurfaces when applying the core proceduresmay be addressed by expanding theexamination.

1. Complete the Internal Control Ques-tionnaire (ICQ). Note explanations forany negative answers and changes sincethe last examination.

Scope of the Examination

2. To determine the scope of the examina- the bank's investment sales programtion: strategic plan. a. Meet with senior management of the ! Conducted a risk and regulatory as-

bank or department to discuss the sessment and adopted a compliancescope and direction of the retail non- program directed at ensuringdeposit investment sales program. compliance with all applicable laws,

b. Review the business plan and policy rules, regulations, regulatoryand procedure manual to gain conditions, and the Interagencyperspective on the nature of the Statement's guidelines.bank's program. Note any significant ! Provided for internal audit/compliancechanges since the last examination. participation in the development of

c. Review compliance and/or audit the program.coverage and reports since the last ! Adopted a program managementexamination. Note: statement aimed at ensuring effective)) Previously identified strengths and supervision of the individuals en-

weaknesses, and gaged in sales activities - whether)) Responses to criticisms in previ- they are employees of the bank or of

ous audit/compliance and exami- another entity involved in bank-relat-nation reports. ed sales of investment products.

Program Management

3. Determine the extent of managementinvolvement in the operation, and thequality of management of the retailnondeposit investment sales program.Review:! Responses to the Program Manage-

ment section of the ICQ.! Resumes of key officials involved in

the management of the salesprogram to determine their experi-ence and tenure with the bank.

! Written performance objectives andperformance appraisals of key man-agement personnel to determinewhether objectives and appraisalsincorporate compliance issues,particularly compliance withdisclosure and customer protectionstandards.

! Reports furnished to senior manage-ment and the board of directors todetermine whether they are suffi-ciently timely, accurate andmeaningful to permit effective over-sight.

4. Review senior management's actions inimplementing the retail nondepositinvestment sales program and in offeringany new products. Specificallydetermine whether bank management:! Participated in the development of

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5. Determine how the retail nondeposit needs. investment sales program is managed. ! Management's comparison of thea. Analyze sales program growth and performance of the products they

earnings performance and determine offer to general market products withwhy certain products have high lev- similar objectives.els of performance. Consider howthis performance relates to incentive 7. Discuss your findings from the productcompensation and the suitability of selection review with senior manage-recommendations to customers. ment and make a judgement about the

b. Review the customer mix and market appropriateness of management's deci-surveys. Look at trends in identifi- sion to continue to offer these products.able classes of customers and bealert for concentrations by types ofcustomers. Also, try to determinewhether customers are viewed asone-time buyers or are being culti-vated to establish longer term rela-tionships.

c. Review the products offered and anymarket surveys and determine therisk inherent in different products.Consider whether management hasattempted to match products toinvestors' needs in general.

d. Review projections for the sales pro-gram and for different products anddetermine whether they:) Are realistic in light of the bank's

customer mix;) Relate to bank staffing and train-

ing plans for the sales, supervi-sion, and compliance functions;and

) Are consistent with the bank'soverall strategic plan.

e. Determine the effectiveness of thebank's self-regulatory policies andprocedures as measured by the num-ber and type of customer complaintsand by responses to the ICQ.

Product Selection

6. Assess the adequacy of managementprocesses to select and review productssold. Review:! Responses to the Product Selection

section of the ICQ.! Methods bank management uses to

select products to meet customer

Use of Customer Information

8. Determine whether policies governingthe permissible uses of bank customerinformation address the steps to betaken to reduce possible confusionamong depositors who are being solicit-ed to purchase nondeposit investmentproducts.

Setting and Circumstances of Sales

9. Determine whether bank managementhas established effective controls todistinguish retail deposit-taking activitiesfrom retail nondeposit investment sales.Consider how the various elements ofthe setting and circumstances may inter-act to influence the customers' percep-tion.

10. Where the deposit-taking and securitiessale functions are performed by thesame personnel, determine if the bankuses appropriate written and oral disclo-sures to guard against customer confu-sion, and the extent to which bank staffis trained to use, and does use, suchdisclosures.


11. Review responses to the Disclosures andAdvertising section of the ICQ and arepresentative sample of each type ofadvertising and promotional material. a. Determine whether all of the required

disclosures are featured conspicu-ously in:)) All written or oral sales presenta-

tions,

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)) Advertising and promotional mate- make suitable recommendations andrials, whether management is discharging its

)) Confirmations and account state- responsibilities under these systems byments that contain the name or reviewing:the logo of the bank or an affili- ! Responses to the Suitability sectionate, and of the ICQ,

)) Periodic statements that include ! Customer complaints and resolutions,information on both deposit and ! Sales patterns,nondeposit products. ! Compensation differentials that may

b. Determine, where applicable, if the influence recommendations, andbank has disclosed the existence of: ! Compliance and/or audit reports.)) An advisory or other relationship

between the bank and any affiliate 13. If your findings in 12, above, are nega-involved in providing nondeposit tive or uncertain, review a sample ofinvestment products, and sales to determine if transactions appear

)) Any early withdrawal penalties, unsuitable for a customer, based onsurrender charge penalties, and responses to the suitability inquiries.deferred sales charges. The sample should include transactions

c. Determine whether bank-related sales involving:advertisements are: !! Customer complaints,)) Accurate, and !! Marketing programs that target a)) Not likely to mislead customers class of customers,

about the nature of the product. !! First-time and risk-averse investors,d. Review product brochures and adver- !! High or low volume salespersons,

tising to ensure that they do not !! More volatile and newer products,imply that the bank stands behind an andinvestment product. Also determine !! Redemptions of annuities or mutualwhether public statements concern- funds after relatively short holdinging the selection of the products a periods.bank offers are reasonable.

e. Determine whether personnel make 14. If, after the review in 13, above, youany written or oral representations are still not certain that recommenda-concerning insurance coverage by tions are suitable, direct bank manage-any entity other than the FDIC, e.g., ment to conduct an independent reviewSecurities Investor Protection Cor- of all affected accounts and to reportporation (SIPC); a state insurance their findings to the EIC.fund; or an insurance company.

If representations about non-FDIC have been disadvantaged, discussinsurance coverage are made, deter- appropriate corrective action with seniormine whether: management. Such action should be)) Each appropriate person who has designed on a case by case basis and

contact with customers is trained may include:concerning the differences among !! Full explanations to customers and,those coverages, and where appropriate, offers to rescind

)) Written or oral explanations of the trade.differences in coverage are provid- !! A recommendation to bring in aned to all customers. independent audit or special counsel

Suitability

12. Judge whether systems in place areadequate to ensure that sales personnel

15. If you determine that customers may

to perform further review of cus-tomer transactions.

!! Other action agreed upon betweenbank management and the EIC.

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Qualifications and Training

16. Assess the bank's process for ensuringthat supervisory, investment sales,audit, and compliance personnel areproperly qualified and adequately trainedby reviewing hiring and training practicesand future plans and determining whe-ther they are:! Designed around the complexity and

risks of the investment productsbeing offered, and

! Consistent with the organization'sprojections for growth and productline expansion.

Compensation

17. Review the compensation plan and as-sess the steps management has taken toensure that compensation programs arenot structured in a way that result inunsuitable recommendations or salesbeing made to customers. a. Be alert to increases in the sales vol-

ume of a particular product, to cus-tomer complaints, and to suitabilityproblems that may relate to theincentive compensation systemand/or changes in compensation.

b. Determine whether supervision ofsales programs or of individual prod-uct offerings increases as incentivecompensation increases.

c. Determine whether referral fees are,in any way, based on a sale beingmade.

d. Review written performance objec-tives and a sample of performanceappraisals for salespersons and deter-mine if the system for motivating andrewarding salespersons strikes a rea-sonable balance between profitabilityand the need to protect customerinterests.

Sales to Fiduciary Accounts

18. Determine whether, on retail nondepositinvestment transactions involving thebank's fiduciary accounts, the bank hascomplied with all applicable state and

federal restrictions, including theEmployee Retirement Income SecurityAct of 1974. a. If proprietary or private label sales to

trust accounts were executedthrough the bank's nondepositinvestment sales program, determineif the transactions were expresslyauthorized under state law or ifauthorization were obtained by thebank.

b. Determine whether management'sjustification of any transfer of trustaccount investments to investmentsacquired through the bank's non-deposit investment sales program hastaken into account all relevantcircumstances, account by acccout.Relevant circumstances include:) The provisions of the trust ac-

count,) The beneficiaries' needs,) The quality of fund management,) The fee structure,) Risk diversification, and) Rates of return.

c. Determine whether the trust depart-ment conducts periodic reviews ofthe ongoing prudence of theinvestment. Such reviews shouldcover:) The quality of the holdings,) The compatibility of investment

objectives, and) The availability of competing in-

vestments, including non-propri-etary products, which mightbetter meet the fiduciary ac-count's investment objectives.

Compliance Program

19. Determine how effective the bank'scompliance program is by reviewing:!! Responses to the Compliance Pro-

gram section of the ICQ,!! The independence of compliance per-

sonnel,!! Training provided to compliance per-

sonnel,!! Automated exception reporting sys-

tems, and!! The scope, frequency, and findings

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of compliance reviews, and responses to of the product and the bank's role infindings. the sales process.

20. Determine whether results of periodic understands and agrees with the wayreviews are formally communicated to the third party vendor selectssenior managers independent of the products.sales function, and whether a follow-upsystem tracks management responses 23. After making a judgment about theto noted exceptions. effectiveness of the oversight of third

21. If prior examination findings, compliance examination procedures that appearreports, a pattern of customer com- appropriate.plaints, or routine oversight by bankmanagement identifies the possibilitythat suitability problems may exist,determine if bank management has con-ducted a thorough review of all affectedaccounts and instituted appropriatecorrective actions.

Third Party Vendors

22. Determine the effectiveness of the ban- written comments.k's oversight program and whether bankmanagement has discharged its respon-sibilities under the program.a. Review responses under the Third

Party Vendor section of the ICQ andthe text of the bank's oversight pro-gram.

b. Review the scope and frequency ofcompleted and scheduled oversightreviews and reviews of customercomplaints and their resolution.

c. Review bank management's responseto recommendations made duringpast examinations.

d. Review the third party vendor agree-ment and determine:) Whether it specifies that such

entities will comply with all appli-cable requirements, includingthose in the Interagency State-ment.

) How bank management assuresitself that third party vendorscomply with the terms of theagreement.

e. Review how bank management deter-mined the adequacy of the steps athird party vendor takes to avoidcustomer confusion about the nature

f. Determine whether bank management

party vendor sales, complete any other

Summary

24. Determine if bank management hasdemonstrated by its actions whether itbelieves customers' interests are criticalto all aspects of its nondeposit invest-ment product sales programs.

25. Discuss significant findings with the EICand bank management and prepare

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Retail Nondeposit Investment SalesInternal Control Questionnaire Section 413.4


Program Management

1. Has the bank's board of directorsadopted a program managementstatement that addresses:! The features of the sales program? 6. Does the bank select the products to be! The associated risks? offered?! The roles of bank employees? ! The roles of third party entities? 7. If so, does the selection process make

2. Do the bank's policies address the fol- sider the customers' needs?lowing issues:! Program objectives? 8. Does a qualified committee or an analyst! Strategies to be employed to achieve who is independent of the sales function

objectives? make the product selections? ! Supervision of personnel involved in

nondeposit investment sales pro- 9. If the bank uses outside consultants tograms? help select products, does bank manage-

! Supervisory responsibilities of third ment determine if the consultant re-party vendors who are selling on ceives compensation from product issu-bank premises? ers or wholesalers?

! Selection of the products the bankwill sell? 10. If the product selection analysis is per-

! Permissible uses of bank customer formed by another party, such as ainformation? clearing broker or third party vendor,

! Communications with customers? does bank management understand and! The setting and circumstances of agree with the analysis method?

nondeposit product sales? ! Disclosures and advertising? 11. Does the bank conduct continuing re-! Suitability of recommendations? views of product offerings to assure! Employee qualifications and training? that they remain acceptable and are such

reviews done at least annually?! Employee compensation systems?! A compliance program? 12. Does bank management consider, as

3. Do written supervisory procedures as- uct issuer's contingency plans for deal-sign a manager the responsibility for: ing with unusual surges in redemptions?! Reviewing and authorizing each sale?! Accepting each new account? 13. Are these contingency plans based on! Reviewing and authorizing all sales- various market scenarios?

or account-related correspondencewith customers? 14. Do the contingency plans include:

! Reviewing and authorizing all adver- ! Emergency staffing?tising and promotional materials prior ! Additional communications capabili-to use? ties?

4. Does the bank use written job descrip-tions to assign management responsi- 15. Does the analysis of fixed and variablebilities? rate annuities include a determination of

5. Do policies and procedures for personnel ance company?who are not directly involved in non-deposit investment product sales detail 16. Does the analysis of fixed and variable

what the employees may say and notsay about investment products?

Product Selection

use of predetermined criteria that con-

part of the selection process, the prod-

! Enhanced operational support?

the credit quality of the issuing insur-

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rate annuities include determining 23. Do operating procedures prohibit tellerswhether the issuing insurance company from offering investment advice, makingcan sell or simply transfer the annuity sales recommendations, or discussingcontract to another insurance company? the merits of any nondeposit investment

Use of Customer Information

17. Do written policies concerning the use ofinformation about bank customers ad-dress:! The minimum standards or criteria for

identifying a customer for solicita-tion?

! Acceptable calling times? ! The number of times a customer may

be called?! The steps to be taken to avoid

confusing depositors about thenature of the products being offered?

Setting and Circumstances of Nondeposit Sales

18. Has a bank officer been assignedresponsibility for reviewing all currentand planned nondeposit investment saleslocations to determine whetherappropriate measures are in place tominimize customer confusion?

19. Are nondeposit investment productssold only at locations distinct fromwhere deposits are accepted?

20. Are sales locations distinguished by useof:! Separate desks?! Distinguishing partitions, railings, or

planters? ! Signs?

21. If personnel both accept deposits andsell nondeposit investment products, dooperating procedures address safeguardsto prevent possible customer confusion?

22. Are the people who sell nondeposit in-vestment products distinguished frompeople who accept deposits by suchmeans as:! Name tags or badges?! Business cards?

product with customers?

24. Does the bank offer nondeposit invest-ment products with product names thatare not:! Identical to the bank's name? ! Similar to a deposit product? (Ex-

ample: XYZ Money Market Fund vs.XYZ Money Market Account.)

25. Does the bank avoid using the words"insured," "bank," or "national" inproduct names?


26. Has bank management designated anofficer to be responsible for ensuringthat bank-prepared investment adver-tisements and advertisements preparedby any other party are accurate andinclude all required disclosures?

27. Is a signed statement acknowledgingdisclosures obtained from each customerat the time that a retail nondepositinvestment account is opened?

28. For accounts established prior to theissuance of the Interagency Statement,are procedures in place to ensure thatsuch a signed statement is obtainedprior to, or at the time of, the nexttransaction?

29. Is there a tracking system designed tomonitor and obtain missing acknowledg-ments?

30. Are all salespeople provided writtendisclosure guidelines for oral presenta-tions?

31. Do the guidelines for oral presentationsclearly direct the speaker to: ! State the required disclosures? ! Clarify the bank's role in the sales

process?

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32. If ratings are used in promoting certain 42. Is each sale approved in writing by aproducts, does bank policy indicate whe- designated manager?ther the bank will disclose ratings chang-es? 43. Are breakpoints considered in both the

33. If so, does policy indicate how such of the suitability of those rec-disclosures will occur? ommendations?

34. If the bank is selling annuities which can 44. Is suitability information for active ac-be transferred to another obligor, is this counts updated periodically?possibility disclosed to prospective cus-tomers? 45. If the bank uses software programs to

Suitability

35. Has a bank officer been assignedresponsibility for implementing andmonitoring the suitability system?

36. Are systems in place to ensure that anysalespeople involved in bankrelated salesobtain sufficient information from cus-tomers to enable them to make ajudgment about the suitability ofrecommendations for particular custom-ers?

37. Do suitability inquiries include informa-tion concerning the customer's: ! Financial and tax status?! Investment objectives?! Other information such as date of

birth, employment, net worth (net ofresidential real estate), income,current investments, or risk toler-ance?

38. Are customer responses to suitabilityinquiries documented on a standard formor any other method that permits ready 49. Does the bank's staffing plan considerreview? its nondeposit investment sales pro-

39. Is there a tracking system designed tomonitor and obtain missing suitability 50. Does the bank seek to employ dedicatedinformation? investment specialists and not platform

40. Are new accounts reviewed and formallyaccepted by a manager before the first 51. Does management have written quali-transfer is finalized? fication requirements for outside hires of

41. Does the new account acceptance pro- ers?cess include a review of the suitabilityinquiry and customer responses? 52. Is a system in place to document back-

initial recommendation and in the review

assist salespersons in making suitabilityjudgments, does the program:! Weight bank proprietary products

and bank deposits similarly to otherproducts?

! Consider breakpoints?

46. If a software program is not used, hasmanagement identified which productsmeet certain investment objectives, orhas management generally categorizedproducts as suitable for eitherunsophisticated, sophisticated, or risk-averse customers?

47. Does the bank use suitability guidelinesthat would limit certain transactions withfirst time or risk-averse investors, orwould require a higher level of approval?

48. Is a bank officer who is independent ofthe sales force assigned responsibilityfor reviewing complaints and theirresolution?

Qualifications and Training

gram?

generalists as sales representatives?

salespeople and sales program manag-

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ground inquiries made about new bank 62. Does the bank have a formal plan tosales employees who have previous meet future retail nondeposit investmentsecurities industry experience to check product sales training needs?for a possible disciplinary history?

53. Has a bank officer been assignedresponsibility for ensuring thatadequate training is provided to bankstaff?

54. Does the bank have a formal trainingprogram for individuals who: ! Make customer referrals for non-

deposit products? ! Are engaged in retail sales of non-

deposit investment products?! Are responsible for supervising

people who make referrals and/orwho engage in selling?

55. Is this training offered as part of:! Initial training?! Continuing training?

56. Is there a training manual showing theobjectives of each initial and subsequenttraining session?

57. Have lesson plans been developed for in-house programs?

58. Are tellers trained:! To not accept orders or sell nonde-

posit investment products?! To avoid offering investment advice?! To not make recommendations?! To not discuss the merits of any

securities with customers?

59. Does the bank provide training that ad-dresses suitability issues?

60. Does suitability training specifically ad-dress customer protection issuesassociated with the most vulnerableclasses of investors who may actuallyprefer the "no investment risk" aspect ofinsured bank deposits?

61. Is product training provided to:! Compliance staff?! Audit staff?

Compensation

63. Are compensation systems set up toavoid paying the same people incentivecompensation for the sale of nondepositinvestment products when no incentivesare paid for renewing certificates ofdeposit?

64. Do supervisory policies control incentivecompensation increases associated withsales contests or the introduction ofnew products?

65. Are referral programs designed so thatemployees, including tellers, may receivea one-time nominal fee of a fixed dollaramount for each customer referred,without regard for whether the sale ismade?

66. Do policies prohibit tellers fromparticipating in contests or other pro-motional programs in which prizes arebased on successful sales to customersreferred?

67. Do policies and procedures precludeincentive compensation based on theprofitability of individual trades by, oraccounts subject to the review of, bankemployees who:! Review and approve individual sales?! Accept new accounts?! Review established customer ac-

counts?

68. Do policies and procedures precludepayment of incentive compensation todepartment auditors or compliance per-sonnel?

69. Does the management structure precludecontrol, audit or compliance personnelfrom reporting to managers whose com-pensation is based on profits fromnondeposit investment products sales?

70. Does the compensation program reduce

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remuneration to sales program managers 73. Does the compliance program call forwhose accounts show: compliance personnel to perform! Missing documents? continuing reviews of:! Unreported customer complaints? ! Changes in the system for reporting! Reversed or "bad" sales? customer complaints and resolutions?! Compliance problems? ! Changes in previously approved stan-

Compliance Program

71. Do audit or compliance personnel:! Determine the scope and frequency

of their own nondeposit investmentsales program reviews?

! Report their findings directly to theboard of directors or an appropriatecommittee of the board?

! Have their performance evaluated bypersons independent of the invest-ment product sales function?

! Receive compensation that in no wayis connected to the success ofinvestment product sales?

! Receive training in products and cus-tomer protection issues?

! Keep abreast of emerging develop-ments in banking and securities lawsand regulations through ongoingtraining?

72. Does the bank's written complianceprogram call for periodic reviews todetermine compliance with policies, pro-cedures, applicable laws and regulations,and the Interagency Statement? Dothose reviews cover:! Customer complaints and their

resolution?! Customer correspondence?! Transactions with employees and

directors or their business interests?! All advertising and promotional

materials?! Scripts or written guidelines for oral

presentations?! Training materials?! Regular and frequent reviews of

active customer accounts?! Customer responses to suitability

inquiries and a periodic comparison ofthose responses to the type andvolume of account activity, with thegoal of determining whether theactivity in an account is appropriate?

dard correspondence withcustomers?

! New advertising and promotionalmaterials prior to use?

! Changes in existing training programsor new training programs?

! Changes in incentive compensationsystems?

! New products under development?

74. Does the timing, scope, and frequencyof compliance reviews consider factorssuch as:

! Changes or differences in incentivecompensation paid on different ornew products?

! Sales or referral contests?! Patterns of sales for specific, espe-

cially new, products?! Patterns of sales to customers who

have been identified as risk-averseinvestors?

! New salespeople?! Customer complaints?

75. Does the bank have a system forensuring that all complaints (written andoral) receive bank management'sattention?

76. Is that system periodically tested byinternal audit to determine whether bankmanagement receives notice of allcomplaints?

77. Does the bank use automated exceptionreporting systems to flag potential com-pliance problems?

78. Do reports list:! Sales by product?! Significant or unusual (for the cus-

tomer) individual sales?! Sales of products the bank considers

more volatile to customers whosesuitability inquiry responses indicate

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an aversion to risk? customer protection systems?! Customer complaints by product,

salesperson, and reason, so that 85. Has the bank developed a written over-patterns can be discerned? sight program to monitor the activities

! Unusual performance by salesper- of outside vendors operating bank-sons, e.g., high or low volume or related sales programs?single product sales?

! Significant volumes of annuity or 86. Does the governing agreement with thirdmutual fund redemptions after short party vendors include provisionsholding periods? regarding:

79. Do reports provide adequate information ! Methods of implementing the cus-to conduct specific suitability reviews for tomer protection standards containedcustomers such as: in the bank's policy?! Risk-averse investors? ! Permission for the OCC and the bank! First-time investors? to have access to appropriate records! Customers with other narrow in- involved in bank-related sales?

vestment objectives? ! The scope and frequency of reports

80. Does the bank employ "testers" whopose as prospective customers and test 87. Do reports furnished by third party ven-the sales presentations for adherence to dors include:customer protection standards? ! A list of all new account openings

81. Has the bank instituted a follow-up ! A list of significant or unusual (forcontact program to verify whether the customer) individual sales?customers understand their investment ! A list of all written and oral customertransactions? complaints and their resolution?

82. Do inquiries in the follow-up contact son, and location?program include discussion of the custo- ! Internal compliance reviews of ac-mer's: counts originated at the bank?! Understanding of what he or she has ! Copies of reports furnished to the

purchased? third party vendor by their regulator?! Understanding of the investment

risks and the absence of deposit 88. Are reports furnished by a third partyinsurance coverage? vendor:

! Initial responses to the salesperson's ! Prepared by someone independent ofsuitability inquiry? the vendor's sales force?

! Understanding of fees? ! Timely and sufficiently detailed?! Problems or complaints?! Understanding of the bank's role in 89. Does bank management have procedures

the transaction? in place to avoid reliance on

83. If the bank operates a follow-up contactprogram, are records of customersresponses maintained?

Third Party Vendors

84. Has a bank officer been assignedresponsibility for ensuring that the bankadequately monitors the effectiveness of

! Training for bank employees?

to be furnished?

and initial trades?

! Sales reports by product, salesper-

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third party audit and control systems ifthe vendor's control personnel receivetransaction-based incentive compensa-tion?

90. If the product selection analysis is per-formed by another party, such as aclearing broker or third party vendor,does bank management understand andagree with the analysis method?

91. If customer information is provided tothe third party vendor, has a legalopinion concerning the bank's authorityto share customer information with thirdparties been obtained?

92. Has a bank officer been assignedresponsibility for ensuring that ade-quate training is provided to bank staff,and for reviewing the hiring and trainingpractices of any third party vendor?

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Retail Nondeposit Investment SalesLaws, Regulations and Rulings Section 413.5


Laws* Regulations+ Rulings+ OCC and Other Issuances**

Customer disclosure 15 USC 77a, 17 CFR 240 I n t e r a g e n c yrequirements 78a, and (Rule 10b-5) Statement on

80a Retail Sales ofN o n d e p o s i tProducts(February 15,1994)

Use of common names 15 USC 80a I n t e r a g e n c yStatement

Investments in 29 USC 9 I n t e r a g e n c ytrust accounts 1001 Statement

(ERISA)

Recordkeeping and con- 12 I n t e r a g e n c yfirmation requirements Statement for securities transac-tions

Antifraud restrictions 15 USC 77a 17 CFR 240 and 78a (Rule 10b-5)

Uniform guidelines AL 93-11 andI n t e r a g e n c yStatement

Customer protection 15 USC 77a, 17 CFR 240 NASD Rules ofrules 78a, and (Rule 10b-5) Fair Practice

80a and InteragencyStatement

* 12 USC, unless specifically stated otherwise.+ 12 CFR, unless sepcifically stated otherwise.** BC = Banking Circular, EC = Examining Circular, AL = Advisory Letter.

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Retail Nondeposit Investment SalesLaws, Regulations and Rulings Section 413.5


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