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Retail Nondeposit Investment Sales Introduction
versations with customers to resolve problems or disputes that may arise at a later date. "Negative consent letters (0.9., notices intorming customers that unless thoy object, the bank assumes the customer understands and does not object to the transactions) may be o usotul element in a compliance program but should not be the sole means of veritying that customers understand nondeposit investment product transactions and the bank's role in the process. Examiners should determine whether a bank officer has been assigned the responsibility for assuring that the bank adequately monitors the nondeposit investment accounts of customers. Examiners should also determine whether the officer has developed or is developing a system to monitor the customer account reviews of outside vendors operating bank-related sales programs. Oversight of Third Party Vendors When a bank uses a third party vondor to sell nondoposit investment products, the bank's board of directors must adopt a written policy addressing tho scopo of the activities of the third party, as well as the procedures the bank intends to use for monitoring the third party's complianco with the interagency Statement. To select the third party vendor and moni. for the ongoing accoptability of the vendor, bank management usually reviews the vendor's experience in the business and the vendor's financial statomont. Bank management also usually contacts other banks with which the vendor has done business for rotoroncos. Examiners should also expect that bank management checkod with the vendor's regulator before it entered into an agreement with the vendor and that management has continued to review reports furnished to the vendor by its regulator(s). Bank management should enter into a
written agreement with a third party vendor that has been approved by the bank's board of directors before the vendor is permitted to otter nondeposit investment products to the bank's customers. The agreement should outline the duties and responsibilities of each party and should include i doscription of all of the activities the third party is permitted to engage in on the bank's promises. The agreemont also should set forth terms for the use of the bank's spaco, personnel, and equipment as well as compensation arrangements for personnel of the bank and the third party. The agreement also should:
Specity that the third party will com. ply with all applicable laws and regulations and will act consistently with the provisions of this temporary inson, especially the provisions relating to customer disclosures, Authorize the bank to monitor the third party by periodically reviewing and veritying that the third party and its sales representatives are complying with its agreement with the bank, with all applicable laws and regulations, and with the provisions
of this temporary insert. • Spocity the type, scope, and tre
quency of reports the third party is to turnish to bank management to Dormit bank management to fulfill its
oversight responsibilities, • Authorize the institution and the
OCC to have access to appropriate
records of the third party, • Require the third party to agree to indemnity the bank for any liability that resulted from third party invest.
ment product sales program actions. • Set forth the training which the bank
expects its employees and third
party personnel to possoss, and • Provide for written omployment con
tracts between the bank and the
third party vondor's employees. Examiners will roviow the agrooment to determine that it specifies that the third party vendor will comply with all applicable requirements contained in the Interagency Statemont. Examiners also will review the
Comptroller's Handbook for National Bank Examiners Temporary Insert - Rebruary 1994
Retail Nondeposit Investment Sales Introduction
agreement to determine if it includes provisions regarding bank oversight and examiner access to appropriate records. It is expected that compliance with the agreement will be periodically monitored by the institution's sonior management. Before entering into an agroement with a third party vendor, bank management also should be satisfied that the vendor uses a product selection process similar to the one outlined below. Banks relying on a third party vendor to select products also should understand and agree with the vendor's method of analysis and document its concurrence with that mothod. Examiners should determine whether management has understood and concurred. Bank management should periodically investigate the vendor's product selection process to ensure that it continues to be appropriato to the bank's customer mix. Examiners also should determine whether bank management understands and agrees with contingency plans developed by the third party vendor and the product issuer to respond to customer orders during unusual surges in redemptions. To fulfill its oversight responsibilities, it is expected that bank management will receive various reports from the third party vendor and have access to the vendor's appropriate records. The reports received will vary with the scope of the sales program and should
be tailored to the noods of the institution. The reports should always include a list of all customer complaints and their resolution. Other reports that may facilitate bank management's over. sight role, could include: • A periodic listing of all new account
openings and descriptions of the
initial trades; • A list of significant or unusual (for
the customer) individual sales during
a reporting period; • Sales reports by product, salesper.
son, and location during a reporting
period; and • Reports of internal compliance re
views of customer accounts originat.
ed at the bank and reports furnished Comptroller's Handbook for National Bank Examiners Temporary Insert - February 1994
to the third party vendor by its regu
lator(s) on at least an annual basis. Bank management must monitor complianco by third party vendors on an ongoing basis. Senior bank managers will be expected to ensure that specific individuais employed by the bank and by the third party vendor are responsible for each activity outlined in the bank's investment sales policy. The degree of bank management's involvement should be dictated by the types of products being offered, the volume of sales, the nature of customers' complaints, and the effectiveness of the third party vendor's customer protection systems. Senior bank management also should appoint an officer rosponsible for ensuring that bank investment advertisements as well as advertisements propared by another party that refer to the bank, or any adver. tisement used in bank-related sales, are accurate, not misloading, and include all required disclosures. In addition, any advertising or promotional material - prepared by or on behalf of a third party vendor - should clearly identity the company solling the nondoposit investment product and should not suggest that the depository institution is the soller. Examiner access to the records of third party vendors should be governed by preliminary examination findings. When such find..gs make it clear that bank managemont has discharged its oversight responsibility by roviowing and responding appropristoly to third party reports, only a few customer complaints have been filed against the vendor, and the vendor's reports are timely, sufficiently detailed, and prepared by someone independent of the vendor's sales forco, examiner access to third party records should generally be limited to the reports furnished to management by the vendor. Product Selection This section describes in general terms the methods that well-managed banks use to
Retail Nondeposit Investment Sales
select specific nondeposit investment are usually regarded as necessary but products and to determine that such prod. secondary considerations. ucts continue to be acceptable to the bank's customer mix. This information is Management also considers the fund's provided to help examiners understand and track record in terms of both risk and rereview the process used by well-managed ward. Management analyzes the fund's banks to make this determination.
not asset value versus total return, its
management or operating expenses, the Bank management should determine the turnover within the fund's portfolio, and specific laws, regulations, regulatory condi- capital gains and other sources of income. tions or other limitations or requirements, Other key considerations include the com. including qualitative considerations, that position of the portfolio and concentrations will govern the sale of products to be in types of holdings, sector weights, and, oftered. Although not required, most well- in the case of equity funds, the percentage run bank investment sales programs limit of ownership represented by individual the number of products oftered so that issues. customers and salespersons will not be presented with an overwhelming number of Management also ovaluates important nonchoicos. Limitations based on product Statistical factors such as the continuity. quality may also make it easier for sales tenure, and demonstrated talent of the managers to shield certain classes of cus- tund's management. Thoy also may contomers from inappropriate products.
sider factors such as the quality of a mutu.
al fund's operational and markoting supAs a general practico, bank investment pont. programs offer at least one type of monoy market mutual fund for customers who aro The bank itselt, and not another entity's interested in liquidity. In addition, most marketing department, should select the banks otter a U.S. government bond tund funds to bo ottored. Independent commit. for customers who stress satory and toos and qualified analysts should make the steady income, an equity fund for custom- final selections, not a sales manager whose ers interested in capital growth, and a tax- viow of the commission structure may exempt bond tund for customers who wish attact this judgmont. to avoid taxos on investment earnings.
If the bank usos outside consultants to help When deciding which funds to otter, man- soloct a mutual fund, bank management . agers should review the fund's perfor. should determine whether the consultant mance over an extended period of time. rocaivos compensation from mutual funds Most bank managers protor to avoid mutual or mutual fund wholesalers. If the analysis funds with volatilo records. Management's is portormed by another party, such as a selection of a family of funds should not be clearing broker or third party vendor, bank based on the portormance of one particular management should understand and agree tund; each fund selection should stand on with the method of analysis and should its own merits.
documont the bank's concurrence. Managemont's soloction of investment Rogardless of who solects the mutual fund products usually begins with an evaluation products, bank managomont will be expect. of the stability of asset values over time od to consider tho issuer's contingency and an assessment of yields to investors. plans for handling unusual surges in reManagement also compares the portor. domptions at the time such products are mance of other funds with similar objec. boing considered. Such contingency plans tives over the same periodis). Specialized normally include omorgoncy statting, comratings services (such as Morningstar or munications, and operational programs that Lipper) or rankings by analytical services so based on various marker scenarios.
Comptroller's Handbook for National Bank Examinars
Retail Nondeposit Investment Sales Introduction
thereby extinguishing its obligation to the purchaser of the annuity. Annuity owners are generally, but not always, asked to consont to this transfer. A bank selling annuities should consider the possibility of such , transtor in its product selection analysis. At a minimum, the bank should disclose this possibility to prospective customers. Interagency Statement on Retail Sales on Mondaposit Investment Products
The full text of the interagency statement begins on the next page.
Bank management should compare these contingency plans to the expected needs of bank customers during periods of stress. Finally, once the initial selection process is complete, bank management should conduct ongoing roviows to assure that the products remain acceptable in light of the bank's objectives and customer's needs. Selection of annuity products is conducted in the same manner. A variable-rato annuity, a hybrid form of investment that contains elements of mutual funds and insur. ance, could be characterized as a mutual fund operated by an insurance company. During product selection, bank managemont should consider the pertormance and composition of the portfolio that is dedicated to the annuity holders. Selection analysis for fixed-rato annuities differs from variable-rato annuities. Since fixed-rate annuities are obligations of insur. anco companies, the risks associated with them relate to the issuer's ability to honor the terms of the annuity contract. Accordingly, the safety of an annuity depends upon the financial standing of the firm that issues it and the selection analysis involves an assessment of the quality and diversification of the company's assots, its holdings of junk bonds, mortgago-backed securities, and problem real estate loans, as well as the continuity of management. Because it is difficult to independently analyzo insurance companies, ratings provided by rating agencies such as A.M. Best, Standard & Poor's, Dutt & Pholps, Moody's and Woiss Resoarch play a part in annuity analysis. If bank management relies significantly on such ratings rather than on its own analysis, howover, examinors should expect that the issuer solected by the bank has roceived top ratings from most of the ratings services. When analyzing annuities, management also should recognize that an issuing insurance company can, in cortain circumstancos, soll or simply transfor the annuity contract to another insurance company.
Comptroller's Handbook for National Bank Examiners Temporary Insert - February 1994
Retail Nondeposit Investment Sales Introduction
Interagency Statement on Retail Sales on Nondoposit Investment Products February 15, 1994 Introduction Recently many insured dopository institutions have expanded their activities in recommending or solling to retail customers nondeposit investment products, such as mutual funds and annuities. Many depository institutions are providing these servo ices at the retail lovel, directly or through various types of arrangements with third partios. Sales activities for nondoposit investment products should ensure that customers for these products are clearly and fully intormed of the nature and risks associated with these products. In particular, where nondeposit investment products are recommended or sold to retail customers, depository institutions should onsure that customors are fully informed that the products:
Are not insured by the FDIC;
by the institution; and, • Are subject to investment risks, includ
ing possible loss of principal investod. Moreover, sales activities involving these investment products should be designed to minimize the possibility of customer contusion and to satoguard the institution from liability under the applicable anti-fraud provisions of the federal securities laws, which, among other things, prohibit materially misloading or inaccurate roprosonta. tions in connection with the sale of socuritios.
(Noto: Each of the four banking agencies has in the past issued guidelines addressing various aspects of the retail sale of nondeposit investment products. OCC Banking Circular 274 (July 19, 1993); FDIC Supervisory Statement FIL-71-93 (October 8, 1993); Foderal Reserva Lotters SR 93. 35 (June 17, 1993), and SR 91.14 (June 6, 1991); OTS Thritt Bulletin 23-1 (September 7, 1993). This Statement is intend. ed to consolidate and make uniform the guidance contained in the various existing statements of each of the agencies, all of which are superseded by this Statement. Some of the banking agencies have adopt. od additional guidelines covering the sale of contain specific types of instruments by dopository institutions, i.e., obligations of the institution itself or of an affiliate of the institution. These guidelines remain in ottoct excopt where clearly inapplicable.) Scope This Statement applies when retail recommendations or sales of nondeposit investmont products are made by:
Employees of the depository institution; Employoos of a third party, which may or may not be attiliatod with the institution (so. Noto, below, addressing which institutions are covered), occurring on the premises of the institution (including talophono sales or recommendations by employees or from the institution's premises and sales or recommendations initiated by mail from its premises); and Salos resulting from a referral of retail custoiners by the institution to a third party when the depository institution
rocoives a bonofit for the rotorral. (Note: This Statement doos not apply to the subsidiaries of insured state nonmembør banks, which are subject to separate provisions, contained in 12 CFR 337.4, rolating to securitios activities. For OTS. regulated institutions that conduct sales of nondoposit investment products through a subsidiary, these guidelines apply to the subsidiary. 12 CFR 545.74 also applies to such salos. Branches and agencies of U.S.
The four federal banking agencios - the Board of Governors of tho Fodoral Roserve System, the Federal Deposit Insuranco Corporation, the Ottico of the Comptroller of the Currency, and the Office of Thritt Supervision are issuing this Statement to provide uniform guidance to dopository institutions engaging in thoso activities.
Comptroller's Handbook for National Bank Examinert Temporary Insert - February 1994