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Retail Nondeposit Investment Sales

Introduction

foreign banks should follow these guidelines with respect to their nondeposit investment sales programs.)

These guidelines generally do not apply to the sale of nondeposit investment products to non-retail customers, such as sales to fiduciary accounts administered by an institution. (Note: Restrictions on a national bank's use as fiduciary of the bank's brokerage service or other entity with which the bank has a conflict of interest, including purchases of the bank's proprietary and other products, are set out in 12 CFR 9.12. Similar restrictions on transactions between funds held by a federal savings association as fiduciary and any person or organization with whom there exists an interest that might affect the best judgment of the association acting in its fiduciary capacity are set out in 12 CFR 550.10. However, as part of its fiduciary responsibility, an institution should take appropriate steps to avoid potential customer confusion when providing nondeposit investment products to the institution's fiduciary customers.)

Adoption of Policies and Procedures

Program Management. A depository insti-
tution involved in the activities described
above for the sale of nondeposit invest-
ment products to its retail customers
should adopt a written statement that
addresses the risks associated with the
sales program and contains a summary of
policies and procedures outlining the fea-
tures of the institution's program and
addressing, at a minimum, the concerns
described in this Statement. The written
statement should address the scope of
activities of any third party involved, as
well as the procedures for monitoring
compliance by third parties in accordance
with the guidelines below. The scope and
level of detail of the statement should
appropriately reflect the level of the
institution's involvement in the sale or
recommendation of nondeposit investment
products. The institution's statement
should be adopted and reviewed periodi-

Comptroller's Handbook for National Bank Examiners
Temporary Insert - February 1994

Section 413.1

cally by its board of directors. Depository institutions are encouraged to consult with legal counsel with regard to the implementation of a nondeposit investment product sales program.

The institution's policies and procedures should include the following:

• Compliance procedures. The proce

dures for ensuring compliance with applicable laws and regulations and consistency with the provisions of this Statement.

• Supervision of personnel involved in sales. A designation by senior managers of specific individuals to exercise supervisory responsibility for each activity outlined in the institution's policies and procedures.

• Types of products sold. The criteria governing the selection and review of each type of product sold or recommended.

• Permissible use of customer information. The procedures for the use of information regarding the institution's customers for any purpose in connection with the retail sale of nondeposit investment products.

• Designation of employees to sell investment products. A description of the responsibilities of those personnel authorized to sell nondeposit investment products and of other personnel who may have contact with retail customers concerning the sales program, and a description of any appropriate and inappropriate referral activities and the training requirements and compensation arrangements for each class of person

hel.

Arrangements with Third Parties. If a depository institution directly or indirectly, including through a subsidiary or service corporation, engages in activities as described above under which a third party sells or recommends nondeposit investment products, the institution should, prior to entering into the arrangement, conduct an appropriate review of the third party. The institution should have a written agreement with the third party that is approved

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Retail Nondeposit Investment Sales

Introduction

by the institution's board of directors. Compliance with the agreement should be periodically monitored by the institution's senior management. At a minimum, the written agreement should:

• Describe the duties and responsibilities of each party, including a description of permissible activities by the third party on the institution's premises, terms as to the use of the institution's space, personnel, and equipment, and compensation arrangements for personnel of the institution and the third party. Specify that the third party will comply with all applicable laws and regulations, and will act consistently with the provisions of this Statement and, in particular, with the provisions relating to customer disclosures.

• Authorize the institution to monitor the third party and periodically review and verify that the third party and its sales representatives are complying with its agreement with the institution.

• Authorize the institution and the appropriate banking agency to have access to such records of the third party as are necessary or appropriate to evaluate such compliance.

• Require the third party to indemnify the institution for potential liability resulting from actions of the third party with regard to the investment product sales program.

•Provide for written employment contracts, satisfactory to the institution, for personnel who are employees of both the institution and the third party.

General Guidelines

1. Disclosures and Advertising
The banking agencies believe that recom-
mending or selling nondeposit investment
products to retail customers should occur
in a manner that assures that the products
are clearly differentiated from insured
deposits. Conspicuous and easy to com-
prehend disclosures concerning the nature
of nondeposit investment products and the
risk inherent in investing in these products
are one of the most important ways of en-

Comptroller's Handbook for National Bank Examiners
Temporary Insert - February 1994

Section 413.1

suring that the differences between nondeposit products and insured deposits are understood.

Content and Form of Disclosure. Disclosures with respect to the sale or recommendation of these products should, at a minimum, specify that the product is:

Not insured by the FDIC;

• Not a deposit or other obligation of, or guaranteed by, the depository institution;

• Subject to investment risks, including possible loss of the principal amount invested.

The written disclosures described above should be conspicuous and presented in a clear and concise manner. Depository institutions may provide any additional disclosures that further clarify the risks involved with particular nondeposit investment products.

Timing of Disclosure. The minimum disclosures should be provided to the customer:

Orally during any sales presentation, Orally when investment advice concerning nondeposit investment products is provided,

• Orally and in writing prior to or at the time an investment account is opened to purchase these products, and

• In advertisements and other promotional materials, as described below.

A statement, signed by the customer, should be obtained at the time such an account is opened, acknowledging that the customer has received and understands the disclosures. For investment accounts established prior to the issuance of these guidelines, the institution should consider obtaining such a signed statement at the time of the next transaction.

Confirmations and account statements for such products should contain at least the minimum disclosures if the confirmations or account statements contain the name or the logo of the depository institution or an affiliate. (Note: These disclosures should be made in addition to any other confirma

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Retail Nondeposit Investment Sales

Introduction

tion disclosures that are required by law or regulation, e.g., 12 CFR 12, 208.8(k)(3), and 344.) If a customer's periodic deposit account statement includes account information concerning the customer's nondeposit investment products, the information concerning these products should be clearly separate from the information concerning the deposit account, and should be introduced with the minimum disclosures and the identity of the entity conducting the nondeposit transaction.

Advertisements and Other Promotional Material. Advertisements and other promotional and sales material, written or otherwise, about nondeposit investment products sold to retail customers should conspicuously include at least the minimum disclosures discussed above and must not suggest or convey any inaccurate or misleading impression about the nature of the product or its lack of FDIC insurance. The minimum disclosures should also be emphasized in telemarketing contacts. Any third party advertising or promotional material should clearly identify the company selling the nondeposit investment product and should not suggest that the depository institution is the seller. If brochures, signs, or other written material contain information about both FDIC-insured deposits and nondeposit investment products, these materials should clearly segregate information about nondeposit investment products from the information about deposits.

Additional Disclosures. Where applicable,
the depository institution should disclose
the existence of an advisory or other ma-
terial relationship between the institution or
an affiliate of the institution and an invest-
ment company whose shares are sold by
the institution and any material relationship
between the institution and an affiliate
involved in providing nondeposit invest-
ment products. In addition, where applica-
ble, the existence of any fees, penalties, or
surrender charges should be disclosed.
These additional disclosures should be
made prior to or at the time an investment
account is opened to purchase these prod-
ucts.

Comptroller's Handbook for National Bank Examiners
Temporary Insert - February 1994

Section 413.1

If sales activities include any written or oral representations concerning insurance coverage provided by any entity other than the FDIC, e.g., the Securities Investor Protection Corporation (SIPC), a state insurance fund, or a private insurance company, then clear and accurate written or oral explanations of the coverage must also be provided to customers when the representations concerning insurance coverage are made, in order to minimize_possible confusion with FDIC insurance. Such representations should not suggest or imply that any alternative insurance coverage is the same as or similar to FDIC insurance.

Because of the possibility of customer confusion, a nondeposit investment product must not have a name that is identical to the name of the depository institution. Recommending or selling a nondeposit investment product with a name similar to that of the depository institution should only occur pursuant to a sales program designed to minimize the risk of customer confusion. The institution should take appropriate steps to assure that the issuer of the product has complied with any applicable requirements established by the Securities and Exchange Commission regarding the use of similar names.

2. Setting and Circumstances Selling or recommending nondeposit investment products on the premises of a depository institution may give the impression that the products are FDIC-insured or are obligations of the depository institution. To minimize customer confusion with deposit products, sales or recommendations of nondeposit investment products on the premises of a depository institution should be conducted in a physical location distinct from the area where retail deposits are taken. Signs or other means should be used to distinguish the investment sales area from the retail deposit-taking area of the institution. However, in the limited situation where physical considerations prevent sales of nondeposit products from being conducted in a distinct area, the institution has a heightened responsibility to ensure appropriate measures are in place

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Retail Nondeposit Investment Sales

Introduction

to minimize customer confusion.

In no case, however, should tellers and other employees, while located in the routine deposit-taking area, such as the teller window, make general or specific investment recommendations regarding nondeposit investment products, qualify customer as eligible to purchase such products, or accept orders for such products, even if unsolicited. Tellers and other employees who are not authorized to sell nondeposit investment products may refer customers to individuals who are specifically designated and trained to assist customers interested in the purchase of such products.

3. Qualifications and Training

The depository institution should ensure that its personnel who are authorized to sell nondeposit investment products or to provide investment advice with respect to such products are adequately trained with regard to the specific products being sold or recommended. Training should not be limited to sales methods, but should impart a thorough knowledge of the products involved, of applicable legal restrictions, and of customer protection requirements. If depository institution personnel sell or recommend securities, the training should be the substantive equivalent of that required for personnel qualified to sell securities as registered representatives. (Note: Savings associations are not exempt from the definitions of "broker" and "dealer" in Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934; therefore, all securities sales personnel in savings associations must be registered representatives.)

Depository institution personnel with super-
visory responsibilities should receive train-
ing appropriate to that position. Training
should also be provided to employees of
the depository institution who have direct
contact with customers to ensure a basic
understanding of the institution's sales
activities and the policy of limiting the
involvement of employees who are not
authorized to sell investment products to
customer referrals. Training should be

Comptroller's Handbook for National Bank Examiners
Temporary Insert - February 1994

Section 413.1

updated periodically and should occur on an ongoing basis.

Depository institutions should investigate the backgrounds of employees hired for their nondeposit investment products sales programs, including checking for possible disciplinary actions by securities and other regulators if the employees have previous investment industry experience.

4. Suitability and Sales Practices Depository institution personnel involved in selling nondeposit investment products must adhere to fair and reasonable sales practices and be subject to effective management and compliance reviews with regard to such practices. In this regard, if depository institution personnel recommend nondeposit investment products to customers, they should have reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information disclosed by the customer. Personnel should make reasonable efforts to obtain information directly from the customer regarding, at a minimum, the customer's financial and tax status, investment objectives, and other information that may be useful or reasonable in making investment recommendations to that customer. This information should be documented and updated periodically.

5. Compensation Depository institution employees, including tellers, may receive a one-time nominal fee of a fixed dollar amount for each customer referral for nondeposit investment products. The payment of this referral fee should not depend on whether the referral results in a transaction.

Personnel who are authorized to sell nondeposit investment products may receive incentive compensation, such as commissions, for transactions entered into by customers. However, incentive compensation programs must not be structured in such a way as to result in unsuitable recommendations or sales being made to customers.

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Retail Nondeposit Investment Sales

Introduction

Depository institution compliance and audit
personnel should not receive incentive
compensation directly related to results of
the nondeposit investment sales program.

6. Compliance
Depository institutions should develop and
implement policies and procedures to en-
sure that nondeposit investment product
sales activities are conducted in compliance
with applicable laws and regulations, the
institution's internal policies and proce-
dures, and in a manner consistent with this
Statement. Compliance procedures should
identify any potential conflicts of interest
and how such conflicts should be ad-
dressed. The compliance procedures
should also provide for a system to monitor
customer complaints and their resolution.
Where applicable, compliance procedures
also should call for verification that third
party sales are being conducted in a man-
ner consistent with the governing agree-
ment with the depository institution.

The compliance function should be con-
ducted independently of nondeposit in-
vestment product sales and management
activities. Compliance personnel should
determine the scope and frequency of their
own review, and findings of compliance
reviews should be periodically reported
directly to the institution's board of direc-
tors, or to a designated committee of the
board. Appropriate procedures for the
nondeposit investment product programs
should also be incorporated into the
institution's audit program.

Comptroller's Handbook for National Bank Examiners
Temporary Insert - February 1994

Supervision by Banking Agencies

The federal banking agencies will continue to review a depository institution's policies and procedures governing recommendations and sales of nondeposit investment products, as well as management's implementation and compliance with such policies and all other applicable requirements. The banking agencies will monitor compliance with the institution's policies and procedures by third parties that participate in the sale of these products. The failure of a depository institution to establish and observe appropriate policies and procedures consistent with this Statement in connection with sales activities involving nondeposit investment products will be subject to criticism and appropriate corrective action.

Questions on the Statement may be submitted to: FRB

FDIC

OCC

Section 413.1

OTS

Division of Banking Supervision and Regulation, Securities Regulation Section, (202) 452-2781; Legal Division, (202) 452-2246. Office of Policy, Division of Supervision, (202) 898-6759; Regulation and Legislation Section, Legal Division (202) 8983796.

Office of the Chief National Bank Examiner, Capital Markets Group, (202) 874-5070.

Office of Supervision Policy. (202) 906-5740; Corporate and Securities Division, (202) 9067289.

Effective date: February 15, 1994

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