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Retail Nondeposit Investment Sales Introduction

Section 413.1

foreign banks should follow these guidelines with respect to their nondoposit 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. (Noto: Restrictions on a national bank's uso 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 propriotary and other products, are set out in 12 CFR 9.12. Similar restrictions on transactions betwoon tunds held by a federal savings association as fiduciary and any person or organization with whom there exists an interest that might attect the best judgment of the association acting in its fiduciary capacity are set out in 12 CFR 550.10. Howover, as part of its fiduciary responsibility, an institution should take appropriate stops to avoid potential customer contusion whon providing nondoposit investment products to the institution's fiduciary customers.) Adoption of Policies and Procedures Program Management. A depository institution 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 proceduros outlining the foatures 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 tho statement should appropriately roflect the lovel of the institution's involvemont in the sale or recommendation of nondoposit investmont products. The institution's statoment should be adopted and reviowod periodi

cally by its board of directors. Depository institutions are encouraged to consult with legal counsel with regard to the implementation of a nondoposit investment product sales program. The institution's policies and procedures should include the following:

Compliance procedures. The procedures 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 activ. ity outlined in the institution's policies

and procoduros. • Types of products sold. The criteria

governing the selection and review of oach type of product sold or recom

monded. • Permissible use of customer informa

ton. 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 employous to sell Invest.

mont products. A description of the responsibilities of those personnel authorized to soll nondoposit investment products and of other personnel who may have contact with retail customers concerning the sales program, and a description of any appropriate and inappropriato rotorral activities and the training requirements and componsation arrangements for each class of personnal.

Arrangements with Third Parties. If a dopository institution directly or indirectly. including through a subsidiary or service corporation, engages in activities as described above under which a third party solls or recommends nondeposit invest. mont products, the institution should. prior to entering into the arrangement, conduct an appropriate roviow of the third party. The institution should have a written agree ment with the third party that is approved

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

Retail Nondeposit Investment Sales Introduction

Section 413.1

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

by the institution's board of directors. Compliance with tho agroomont 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. • Specity that the third party will comply

with all applicable laws and regulations, and will act consistently with the provisions of this Statoment and, in particular, with the provisions relating to cus

tomar disclosures. • Authorize the institution to monitor the

third party and periodically review and verity that the third party and its sales representatives are complying with its

agreement with the institution. • Authorize the institution and the appro

priate 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 indemnity tho

institution for potential liability resulting from actions of the third party with regard to the investment product salos

program. • Provide for written employment con

tracts, satisfactory to the institution, for personnel who are employeos of both

the institution and the third party. General Guidelines 1. Disclosurus and Advertising The banking agencies believe that rocom. mending or selling nondoposit invostment products to retail customors should occur in a manner that assures that the products are clearly differentiated from insured deposits. Conspicuous and easy to com. prehend disclosures concorning the naturo of nondoposit investment products and the risk inherent in investing in these products are one of the most important ways of on.

Content and form of Disclosuro. Disclosuros with respect to the sale or recommondation of those products should, at a minimum, spocity that the product is:

Not insured by the FDIC; • Not a doposit or other obligation of, or

guaranteed by, the depository institu

tion; • Subject to investment risks, including

possible loss of the principal amount

invented. The written disclosuros described above should be conspicuous and presented in a cloar and concise manner. Dopository institutions may provide any additional disclosures that further clarity the risks involved with particular nondeposit invest. mont products. Timing of Disclosure. The minimum disclosures should be provided to the customer: • Orally during any salos presentation, • Orally when invostmont advico concorn

ing nondoposit investment products is

provided, • Orally and in writing prior to or at the

time an investment account is oponed

to purchasо those products, and • In advertisements and other promotional

materials, as described below. A statomont, signed by the customer, should be obtainod at the timo such an account is oponed, acknowlodging that the customer has rocoived and understands the disclosuros. For investment accounts ostablished prior to the issuance of these guidelines, the institution should consider obtaining such a signod statement at the time of the next transaction. Confirmations and account statements for such products should contain at least the minimum disclosuros if the confirmations or account statements contain the name or tho logo of the depository institution or an attiliato. (Noto: Thoso disclosures should bo mado in addition to any other confirma

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

19

Retail Nondeposit Investment Sales Introduction

Section 413.1

tion disclosures that are required by law

or regulation, @.9., 12 CFR 12, 208.8(k)(3), and 344.) If a customer's periodic deposit account statement includes account intor. mation concerning the customer's nondeposit investment products, the intor. mation concerning those 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 salos material, written or other. wise, about nondoposit investment prod. ucts sold to retail customers should conspicuously includo at least the minimum disclosures discussed above and must not suggest or convey any inaccurate or mis. leading impression about the naturo 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 identity the company selling the nondoposit investment product and should not suggest that the dopository 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 segregato information about nondoposit investment products from the intormation about deposits. Additional Disclosures. Whore applicable, the depository institution should disclose the existence of an advisory or other material relationship betwoon the institution or an affiliate of the institution and an invest. ment company whoso shares are sold by the institution and any material relationship between the institution and an attiliato involved in providing nondeposit invest. mont products. In addition, where applicable, the existence of any foos, penalties, or surrender charges should be disclosed. These additional disclosures should be mado prior to or at the timo an invostmont account is opened to purchasо these products.

If sales activities include any written or oral representations concerning insurance coverage provided by any entity other than the FDIC, e.g., the Securities Investor Protection Corporation (SIPC), a state insurance tund, or a private insurance company, then clear and accurate written or oral explanations of the coverage must also be providod to customers when the representations concerning insurance coverage are made. in order to minimize possible contusion with FDIC insuranco. 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 contusion, a nondoposit 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 contusion. The institution should take appropriate steps to assure that the issuer of tho product has complied with any applicable requiremonts established by the Securities and Exchange Commission regarding the use of similar names. 2. Sotting and circumstances Selling or recommending nondeposit invest. mont 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 nondoposit investment products on the premises of a depository institution should be conducted in a physical location distinct from the area where retail deposits are takon. Signs or other moans should be used to distinguish the investment sales aroa 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 appropriato measures aro in place

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

20 Section 413.1

Retail Nondeposit Investment Sales Introduction

updated periodically and should occur on an ongoing basis.

to minimize customer contusion. 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, quality a customer as eligible to purchase such products, or accept orders for such prod. ucts, even if unsolicited. Tallers and other employees who are not authorized to sell nondeposit investment products may reter 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. It depository institution personnel soll or recommend securities, the training should be the substantive equivalent of that required for porsonnel qualified to sell socurities as registored representatives. (Note: Savings associations are not exempt from the definitions of "broker and 'dealer" in Sections 3(a)(4) and 3(6)(5) of the Securities Exchange Act of 1934; therefore, alt securities sales personnel in savings associstions must be registered representatives.) Depository institution personnel with supor. visory responsibilitios should roceive training 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 aro not authorized to sell investment products to customer referrals. Training should be

Depository institutions should investigate the backgrounds of employees hirad for their nondoposit 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 porsonnel involved in selling nondoposit investment products must adhero to fair and reasonablo sales practices and be subject to ottective management and compliance reviews with regard to such practices. In this regard, if depository institution personnel recommend nondoposit investment products to customers, thoy should have reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information dis. closed by the customer. Personnel should make reasonable efforts to obtain informa. tion 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 recommondations to that customer. This intor. mation should be documented and updated periodically. 6. Compensation Depository institution employees, including tallers, may receive a one-timo nominal toe of a fixed dollar amount for each customer referral for nondeposit investment prod. ucts. The payment of this referral fee should not dopond on whether the referral results in a transaction.

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

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

21 Section 413.1

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 onsure that nondeposit investmont product sales activities are conducted in complianco with applicable laws and regulations, the institution's internal policies and procedures, and in a manner consistent with this Statement. Compliance procedures should identity any potential conflicts of interest and how such conflicts should be addressed. The compliance procedures should also provide for a system to monitor customer complaints and their resolution. Where applicable, compliance procedures also should call for vorification that third party sales are being conducted in a manner consistent with the governing agreemont with the depository institution. The complianco function should be conducted independently of nondoposit investment product sales and management activities. Compliance personnel should determine the scope and frequency of their own review, and findings of compliance roviews should be periodically reported directly to the institution's board of directors, or to a designated committoo of the board. Appropriate procedures for tho nondeposit invostment product programs should also be incorporated into the institution's audit program.

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 those 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 nondoposit investment products will be subject to criticism and appropriate corrective action. Questions on the Statement may be submitted to: FRB - Division of Banking Supervision

and Regulation, Securities Regulation Soction, (202) 452-2781;

Logal Division, (202) 452-2246. FDIC Ottico of Policy. Division of

Supervision, (202) 898-6759; Regulation and Legislation Sec. tion, Legal Division (202) 898.

3796. осс. Office of the Chief National Bank

Examiner, Capital Markets Group,

(202) 874-5070. OTS Office of Supervision Policy.

1202) 906-5740; Corporate and Securitios Division, (202) 9067289.

Ettective date: February 15, 1994

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

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