10 To reduce customer confusion between insured and uninsured products, the Interagency Statement contains the following specific guidelines: Disclosure and advertising for mutual funds and other investment products should clearly indicate that the products are not FDIC-insured, are not obligations of the bank, are not guaranteed by the bank, and involve risk, including the possible loss of principal. Banks should obtain a signed statement from customers acknowledging that they have been informed about the nature of these investment products. Bank tellers and other bank employees working in the teller area should not sell uninsured investment products or offer investment advice. Banks should take steps to distinguish between retail deposit-taking and retail nondeposit sales functions. A bank should not offer investment products with a name identical to that of the bank. Because of the potential for customer confusion, the guidance warns banks about the risk in marketing investment products with names similar to the bank's name, and provides for heightened scrutiny of programs that use such names. This emphasis on disclosure and education of bank customers reflects our view that, when properly informed of the nature of the products banks offer, customers will make the choices that best meet their financial objectives. We will monitor how successful these disclosure efforts are in overcoming customer confusion, and as part of a joint project with the SEC, the OCC will evaluate a variety of disclosure tools. The interagency guidance also addresses the supervision and training of staff who recommend and sell investment products, compensation incentives for staff, and the need to ensure that investment products recommended by the bank are suitable for each particular customer. In August and September of 1993, the OCC began testing new examination procedures for mutual fund activities of national banks. At the same time, the OCC began training examiners in the use of these procedures. On February 24, 1994, based on experience gained in using the draft procedures in the field, the OCC issued detailed guidance to examiners on retail nondeposit investment products, including mutual funds. The guidance sets forth the procedures that examiners are to use in evaluating the adequacy of a bank's policies in the following areas: Senior management oversight of the scope and direction of the bank's mutual fund (and other retail nondeposit investment sales) activities. 11 Qualifications, training, compensation, and adequacy of senior management oversight of mutual fund sales personnel. The accuracy and completeness of customer disclosures and advertising, with particular emphasis on the riskiness and uninsured status of mutual fund accounts. The bank's procedures for determining the suitability of mutual fund products that they recommend to individual bank customers. The use that the bank will make of customer information. Compliance with state and federal restrictions on mutual fund transactions involving the bank's fiduciary accounts. Oversight of third-party vendors. Mutual Fund Examinations The OCC monitors compliance with its mutual fund guidelines through a program of examinations focusing on retail sales of mutual funds and other retail nondeposit investment products. Since the beginning of 1993, the OCC has conducted 337 examinations focusing on mutual funds and other retail nondeposit investment products. A portion of multinational and larger regional banks--which account for most mutual fund sales--were examined during the second half of 1993. The rest of the large banks are scheduled for mutual fund examinations in 1994. Going forward, the OCC will examine all national banks that sell mutual funds or annuities as part of the OCC's regularly scheduled examinations. The frequency of examination varies from every 12 to every 18 months, depending on the bank's asset size, its overall condition, and the occurrence of a change in control of a bank. Most banks will be examined once every 12 months. Examiners will use the new examination procedures that I described above. They will review the bank's business plan and its policies and procedures governing its mutual fund operations, its compliance with OCC guidelines, its response to any criticism that the OCC made in previous examinations, and its compliance with all other applicable laws, rules, regulations, and regulatory conditions imposed by bank regulators. Examinations will be tailored to the scope of the bank's mutual fund sales activities. Large banks that operate their own sales program will initially be examined more extensively than community banks that rely exclusively on independent third-party vendors to operate their mutual fund sales programs. In both cases, however, examiners will expand the scope of the examination to address issues raised in their initial review. 12 Federal Securities Laws and Regulation Many banking companies choose to conduct brokerage operations such as mutual fund brokerage in separate subsidiaries or affiliates of the bank. Those separate entities are regulated by the SEC and the NASD in the same manner as any other non-bank broker. Moreover, such entities are subject to additional oversight under the federal banking laws. Similarly, many banks conduct investment advisory activities in separate companies that are regulated under both the Investment Advisors Act and federal banking laws. Congress provided certain bank exemptions from the federal securities laws by excluding banks from the definition of broker/dealer under the Securities and Exchange Act of 1934 and from coverage under the Investment Advisers Act of 1940. However, banks are still subject to a comprehensive regulatory scheme that addresses many of the same types of concerns as the federal securities laws. For example, those banks that conduct these activities under the exemptions from the federal securities laws are subject to: Anti-fraud provisions under Section 10b of the Exchange Act and Rule 10b-5; The Interagency Statement on Sales of Nondeposit Investment Products; Recordkeeping and confirmation requirements for brokerage customers under 12 Fiduciary regulations at 12 C.F.R. Part 9 and fiduciary obligations imposed by state law; The same restrictions that apply to non-bank investment advisors in the Investment Company Act of 1940, for national banks acting as investment advisers to registered investment companies; SEC examinations of national banks acting as investment advisers to registered investment companies; Restrictions on transactions with affiliates imposed by Sections 23A and 23B of the Federal Reserve Act; and Enforcement actions brought by their primary banking regulator, pursuant to 12 U.S.C. § 1818, for violations of any law or regulation, unsafe or unsound banking practices, or for violations of any conditions imposed in writing by the appropriate federal banking agency in connection with the grant of any application or other request by the bank. Banks are thus subject to a combination of banking and securities laws and supervision by bank and securities regulators. To the extent Congress has exempted certain bank functions 13 from the securities laws, the primary regulators of banks operating in those areas have the authority and the responsibility to ensure that banks conduct those activities safely, soundly and in the best interests of the investing public. Should the OCC find that additional specific regulation is warranted for these activities, we will certainly take appropriate action, including adopting any needed regulations and/or imposing appropriate conditions in connection with the grant of bank applications related to securities activities. Coordination with the SEC areas. The OCC and SEC coordinate their oversight of mutual fund activities in a number of Joint Examinations. The OCC has proposed to the SEC that the two agencies conduct joint examinations of banks and operating subsidiaries involved in mutual fund sales activities. On February 22, 1994, OCC and SEC staffs discussed developing general guidelines for handling these examinations. The OCC has proposed to the SEC that the two agencies coordinate examination efforts for banks and operating subsidiaries that are subject to oversight by both agencies. We also proposed coordinating examinations on entities that, although subject to only one agency's oversight, would be relevant to the other agency's supervisory efforts. For example, the SEC has expressed concern about its inability to examine national bank investment advisory activities. The SEC has the authority to review banks' records relating to mutual funds advised by banks. The SEC would like to review other bank investment advisory records to determine if banks are allocating more favorable trades to particular customers rather than mutual funds. Through our coordination efforts, we should be able to obtain jointly, or to share with each other, information that would permit the SEC and OCC to identify abusive practices. In the past, the OCC and SEC have conducted joint examinations of bank transfer agents. Sharing Information. The OCC and SEC share a variety of supervisory and examination information. The OCC has provided the SEC access to our reports of examinations, work papers, and examiners in connection with SEC investigations. We also provide information to the SEC to assist it with review of disclosures relating to bank holding companies with national bank operating subsidiaries. The OCC also refers potential violations of law to the SEC and has brought joint enforcement actions in appropriate cases. The SEC has also provided the OCC with access to its inspection reports and internal memorandum, and referred cases to the OCC. Disclosures. OCC staff arranged an interagency meeting with staff of the SEC, the Federal Reserve Board, and the Office of Thrift Supervision to discuss coordinating banking 14 agency disclosures with the SEC's disclosures. We discussed the possibility of developing consistent disclosures for both bank regulatory purposes and for SEC requirements, particularly with regard to the SEC's required disclosures on the cover page of the prospectus. We also discussed the SEC's plans to handle situations where funds are sold in bank-related sales without the required disclosures on the prospectus. Finally, OCC staff also discussed with the SEC that the Investment Company Institute (ICI) had written to all of the agencies suggesting that we consider consistent disclosures for money market funds. The ICI asked that we consider coordinating the banking agencies' loss of principal disclosure with the SEC's warning that the constant net asset value may not be maintained. Mellon/Dreyfus Under OCC regulations, a national bank that intends to acquire, establish, or perform new activities in an operating subsidiary must notify the OCC before doing so. The bank may proceed with its plans unless the OCC notifies the bank within 30 days that creation of the subsidiary raises issues that require additional information or additional time for analysis. In that event, the bank cannot proceed until it receives written approval from the OCC. On December 30, 1993, Mellon Bank, N.A. filed notice with the OCC of its intention to acquire the Dreyfus Corporation (Dreyfus) as an operating subsidiary of the bank. Dreyfus proposes to engage only in activities that the OCC has previously found to be permissible for national banks and their operating subsidiaries, such as brokerage services, investment advice to mutual funds and the public, and administrative services to mutual funds and their shareholders. Dreyfus would not engage in the underwriting, issue, flotation, public sale, or distribution of securities--activities which the Glass-Steagall Act generally prohibits for national banks. The OCC publicly announced the receipt of the Mellon notification in the OCC's Weekly Bulletin, as we do for all operating subsidiary notifications. On January 5th, the OCC notified Mellon that it was extending the 30-day period to allow for thorough review of this complex transaction. As part of the notice, Mellon made various factual representations and commitments concerning the proposed activities of Mellon and Dreyfus. The representations and commitments are aimed at ensuring that the transaction is consistent with bank safety and soundness requirements, consumer protection, and various legal requirements. In particular, the representations and commitments relate to transactions between the bank, the subsidiaries, and the mutual funds; transactions between the bank and the subsidiaries and the third party distributor; disclosure matters; conflicts of interest; and other important issues. Mellon also provided a Policy Statement on Mutual Funds that addresses many of these matters. Mellon and Dreyfus, in a letter to Chairman Dingell dated February 18, 1994, indicated their willingness to have the commitments set forth in the Policy Statement become conditions of regulatory approval. Although the OCC has made no final decisions, if we were to approve the |