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Retail Nondeposit Investment Sales Examination Objectives

1. To determine if the bank has taken reasonable steps to ensure that retail customers can distinguish between insured deposits and uninsured nondeposit investment products.

2. To determine if the banks' policies, procedures, and practices provide for an adequate self-regulatory system that is designed to ensure customer protections in all aspects of the sales programs.

Section 413.2

3. To ensure that bank management operates the bank's nondeposit investment sales program in a safe and sound manner and complies with OCC guidelines, interagency statements, and all applicable laws and regulations.

4. To initiate corrective action when the bank's policies, practices, procedures, or managerial controls are deficient or when the bank has failed to comply with laws, rules, regulations or OCC guidelines.

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

Retail Nondeposit Investment Sales Examination Procedures

All examiners should be familiar with all examination procedures, and should complete any steps they think are necessary. However, there are some reasonable standards for which procedures form the basis of review of certain types of operations:

For a community bank that uses an independent third party vendor to operate its retail sales program, examiners may find it adequate to complete only the Third Party Vendor section of the ICQs and the related examination procedures.

For a bank that operates its own sales program or operates through a joint venture or an affiliated broker/dealer, an examiner will usually find it necessary to complete all sections at the first examination. At subsequent examinations of sales programs with no apparent weaknesses, completion of only the core examination procedures (indicated in bold type) may be adequate. Any concern that surfaces when applying the core procedures may be addressed by expanding the examination.

1. Complete the Internal Control Questionnaire (ICQ). Note explanations for any negative answers and changes since the last examination.

Scope of the Examination

2. To determine the scope of the examination:

a. Meet with senior management of the bank or department to discuss the scope and direction of the retail nondeposit investment sales program.

b. Review the business plan and policy and procedure manual to gain perspective on the nature of the bank's program. Note any significant changes since the last examination.

c. Review compliance and/or audit coverage and reports since the last examination. Note:

- Previously identified strengths and weaknesses, and

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

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An advisory or other relationship between the bank and any affiliate involved in providing nondeposit investment products, and

- Any early withdrawal penalties, surrender charge penalties, and deferred sales charges.

c. Determine whether bank-related sales advertisements are: Accurate, and

Not likely to mislead customers about the nature of the product. d. Review product brochures and advertising to ensure that they do not imply that the bank stands behind an investment product. Also determine whether public statements concerning the selection of the products a bank offers are reasonable.

⚫. Determine whether personnel make any written or oral representations concerning insurance coverage by any entity other than the FDIC, e.g., Securities Investor Protection Corporation (SIPC); a state insurance fund; or an insurance com

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

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12. Judge whether systems in place are adequate to ensure that sales personnel make suitable recommendations and whether management is discharging its responsibilities under these systems by reviewing:

• Responses to the Suitability section of the ICQ,

• Customer complaints and resolutions,

• Sales patterns,

• Compensation differentials that may influence recommendations, and

• Compliance and/or audit reports.

13. If your findings in 12, above, are negative or uncertain, review a sample of sales to determine if transactions appear unsuitable for a customer, based on responses to the suitability inquiries. The sample should include transactions involving:

Customer complaints.

Marketing programs that target a class of customers,

First-time and risk-averse investors. High or low volume salespersons. • More volatile and newer products. and

• Redemptions of annuities or mutual funds after relatively short holding periods.

14. If, after the review in 13, above, you are still not certain that recornmenda

Retail Nondeposit Investment Sales Examination Procedures

tions are suitable, direct bank management to conduct an independent review of all affected accounts and to report their findings to the EIC.

15. If you determine that customers may have been disadvantaged, discuss appropriate corrective action with senior management. Such action should be designed on a case by ouse basis and may include:

• Full explanations to customers and, where appropriate, offers to rescind trade.

• A recommendation to bring in an independent audit or special counsel to perform further review of customer transactions.

• Other action agreed upon between bank management and the EIC.

Qualifications and Training

16. Assess the bank's process for ensuring that supervisory, investment sales, audit, and compliance personnel are properly qualified and adequately trained by reviewing hiring and training practices and future plans and determining whether they are:

Designed around the complexity and risks of the investment products being offered, and

• Consistent with the organization's projections for growth and product line expansion.


17. Review the compensation plan and assess the steps management has taken to ensure that compensation programs are not structured in a way that result in unsuitable recommendations or sales being made to customers. a. Be alert to increases in the sales volume of a particular product, to customer complaints, and to suitability problems that may relate to the incentive compensation system and/or changes in compensation. b. Determine whether supervision of

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

Section 413.3

sales programs or of individual product offerings increases as incentive compensation increases. c. Determine whether referral fees are, in any way, based on a sale being made.

d. Review written performance objectives and a sample of performance appraisals for salesparsons and determine if the system for motivating and rewarding salespersons strikes a reasonable balance between profitability and the need to protect customer interests.

Sales to Fiduciary Accounts

18. Determine whether, on retail nondeposit investment transactions involving the bank's fiduciary accounts, the bank has complied with all applicable state and federal restrictions, including the Employee Retirement Income Security Act of 1974.

a. If proprietary or private label sales to trust accounts were executed through the bank's nondeposit investment sales program, determine if the transactions were expressly authorized under state law or if authorization were obtained by the bank.

b. Determine whether management's justification of any transfer of trust account investments to investments acquired through the bank's nondeposit investment sales program has taken into account all relevant circumstances, account by acccout. Relevant circumstances include:

-The provisions of the trust account,

-The beneficiaries' needs, -The quality of fund management,

The fee structure,

Risk diversification, and
Rates of return.

c. Determine whether the trust de

partment conducts periodic re

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