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the course of the review of the community banks, the OCC criticized some aspect of mutual fund activities in 34 banks. With respect to those 34 banks, the OCC criticized mutual fund practices in one or more of the following areas: (i) adequacy of disclosures and advertising 25 banks; (ii) adequacy of mutual fund policies and procedures - 13 banks; (iii) adequacy of suitability management and documentation - 11 banks; (iv) program management - 10 banks; (v) oversight of third party vendors - 8 banks; (vi) adequacy of audit function - 6 banks; (vii) appropriateness of incentive compensation systems - 3 banks; and (viii) overall setting and circumstances - 3 banks. During the course of the review of the bank holding companies, the OCC criticized some aspect of mutual fund activities in 39 bank holding companies. With respect to those 39 companies, the OCC criticized mutual fund practices in one or more of the following areas: (i) adequacy of disclosures and advertising - 29 institutions; (ii) adequacy of mutual fund policies and procedures - 13 institutions; (iii) program management - 10 institutions; (iv) adequacy of suitability management and documentation - 9 institutions; (v) appropriateness of incentive compensation systems - 7 institutions; (vi) adequacy of audit function - 6 institutions; (vii) overall setting and circumstances - 5 institutions; and (ix) product selection - 5 institutions.

With respect to many of the criticisms noted above, corrective action was undertaken immediately; in the others, bank management committed to correct the deficiencies. In accordance with OCC policy, examiners will go on-site at each institution offering mutual funds within the present 12- or 18-month supervisory cycle, or sooner if warranted, to ensure that appropriate corrective action has been taken. In the event corrective action was not implemented, the OCC will seek all appropriate enforcement remedies.

3. Please provide copies of customer complaints filed with the OCC last year involving mutual funds. Please advise us of the final disposition of these complaints. With respect to the complaints that resulted in restitution to customers, please describe the nature of the violation involved, and whether restitution was voluntarily offered, or required by the OCC.

Pursuant to your request, we have attached copies of the customer complaints filed with the OCC involving mutual funds (Attachment B). A review of complaints filed with all OCC offices revealed that 18 complaints involving mutual funds were filed with the OCC from January 1, 1993 through the first quarter of 1994. Customer and bank names have been redacted from the attached copies.

As the attached copies will indicate, 2 of the 17 complaints are unresolved, 9 cases resulted in reimbursement to the customer, 3 cases failed to result in reimbursement, and 3 cases sought no reimbursement. The 8 cases that resulted in reimbursement involved customer/bank disputes in one or more of the following areas: (i) failure to disclose terms/risks of the investment - 5; (ii) suitability - 2; and (iii) unauthorized purchase - 1. In each complaint listed above, the OCC contacted the bank concerning the specific customer complaint. The restitution provided was voluntarily offered by the bank.

4.

In how many instances and involving what program areas or violations has the
OCC made enforcement referrals to the SEC? What is OCC policy in this area?

Since 1991, the OCC has made 24 referrals to the SEC for violations of the federal securities laws. The OCC made referrals in these instances for possible violations such as insider trading, violations of Rule 144, improper transfer agent activities, and inaccurate reporting of financial statements and other disclosure problems by bank holding companies. In that time, the OCC also has granted the SEC access to information collected and maintained by the OCC in 22 instances. The OCC's revised Securities Activities Enforcement Policy describes the OCC's policy of making appropriate referrals to the SEC and other regulatory agencies and cooperating with such agency's investigation and prosecution of securities law violations. Examining Issuance 252 (July 26, 1990) (Attachment C) details procedures for referring transfer agent violations to the SEC. When the OCC uncovers incidents of noncompliance with the federal securities laws that are not under its jurisdiction, the OCC refers such allegations to the SEC and cooperates with the SEC's investigation and prosecution.

5.

How many national banks have a suitability program? What do national bank suitability programs entail? How are national bank suitability programs examined and enforced? How do national bank suitability programs differ from the requirements of the NASD suitability rules?

The vast majority of the sales of retail nondeposit investment products in banks occur in either bank subsidiaries, affiliated non-banks, or unaffiliated broker/dealers operating under agreement with the bank. Each of the above listed entities is required to be registered as a broker/dealer with the SEC and is subject directly to the NASD's Rules of Fair Practice. Sales of retail nondeposit investment products occurring directly in banks are subject to a supervisory scheme designed to achieve the same protections accorded by NASD rules. The OCC expects all national banks to adopt suitability programs at least as comprehensive as that required under the Rules of Fair Practice.

Under existing OCC policy, all national banks engaging in the sale of retail nondeposit investment products are expected to determine, consistent with the NASD Rules of Fair Practice ("NASD Rules"), whether each recommended investment product is an appropriate investment for the customer. The Interagency Statement on Retail Sales of Nondeposit Investment Products ("Interagency Statement") sets forth suitability standards that track the language of the NASD Rules (see Attachment D, which compares the language of the Interagency Statement and the NASD Rules). In addition, OCC examination procedures ("Examination Procedures") specifically reference the NASD standards as appropriate for national banks. See Comptroller's Handbook for National Bank Examiners § 413.1. Banks should ensure that any salespeople involved in the sale of retail nondeposit investment products obtain sufficient information from customers to enable the salesperson to make a judgment about the suitability of the recommendation for particular customers. As detailed in the Examination Procedures, "[a]t a minimum, suitability inquiries should be made consistent with the Rules of Fair Practice concerning the customer's financial and tax status,

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investment objectives, and any other factors that may be relevant, prior to making recommendations to the customer." OCC policy requires that this information be documented and updated as necessary. The OCC views banks operating a retail securities business without appropriate suitability procedures to be engaging in an unsafe and unsound practice. As detailed in the response to question 6a, unsafe and unsound practices may constitute a violation of 12 U.S.C.§ 1818 potentially subjecting the bank to the full range of OCC enforcement remedies.

You have also inquired how national bank suitability programs are examined. During the present supervisory cycle, the OCC will be reviewing the activities of every national bank offering mutual fund products. A detailed review of bank suitability systems will be a principle focus of the OCC's review. As set forth expressly in OCC examination guidelines, examinations of national bank suitability programs should include, among other actions, a review of the systems the bank has in place to make suitability inquiries, suitability judgments, and periodic account reviews. Additionally, examiners should investigate marketing programs that target a class of customers, customer complaints, sales to first-time and risk adverse investors, sales made by high- or low-volume salespersons, volatile and new products, and the existence of mutual fund redemptions after relatively short testing periods.

An inquiry into the examination of suitability programs, by necessity, requires an analysis of not only applicable written regulations or policies, but also a review of personnel available to examine and enforce those written programs. As is more fully detailed in a memorandum attached under a separate cover to you this date, a comparison of personnel resources of the SEC with the OCC and other Federal banking agencies makes it clear that the bank regulators have far greater staff resources to police the operations of banks involved in mutual fund activities. The OCC has devoted considerable supervisory attention to bank involvement in mutual funds. As stated above, the OCC will examine the activities of every national bank offering mutual fund products during the present supervisory cycle.

6a.

How does 12 U.S.C. § 1818 authorize the OCC to enforce the federal securities laws and the rules and regulations thereunder? How can violations of the federal securities laws by a bank, its securities subsidiary, or a third-party broker-dealer be considered "unsafe and unsound practices"? Has any court ever considered 12 U.S.C. § 1818 to reach violations of the federal securities laws and the rules and regulations thereunder?

There are two ways that section 1818 authorizes the OCC to enforce the federal securities laws. First, section 1818 authorizes the imposition of cease-and-desist orders, removals, and civil money penalties for violations of any law, rule, or regulation, or any condition imposed in writing. The plain language of section 1818 permits the OCC to act to remedy violations of any law, rather than violations of only banking laws. Administrative enforcement decisions have upheld such an interpretation of section 1818's scope. See, e.g., In the Matter of Robert J. Aulie, Brooklyn Savings Bank, Danielson, Connecticut, Docket No. FDIC-91-189e. Second, the "unsafe or unsound practices" authority in section 1818 provides

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another basis for bringing actions for violations of the federal securities laws. The legislative history to the Financial Institutions Supervisory Act of 1966 defined "unsafe or unsound practice" as "any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds." 112 Cong. Rec. 26474 (1966). Federal courts have consistently relied on this definition in determining what constitutes an unsafe or unsound banking practice. Improper conduct of securities activities exposes banks to significant litigation risk and could in fact constitute an unsafe and unsound banking practice. Therefore, conduct that violates the federal securities laws also may constitute an unsafe or unsound practice.

6b.

Please submit a report on all actions taken by the OCC against banks or their employees for violations of the federal securities laws. How many actions has the OCC brought against banks in their capacity as municipal securities and government securities dealers; transfer agents; and for mutual fund or other securities sales? How does the OCC's investor protection enforcement program compare and contrast with the SEC's investor protection enforcement program?

We note that the efficacy of our enforcement program cannot be measured solely by the number of formal actions brought. Because of the OCC's ongoing examination presence in national banks, we can identify operational areas needing enhancement and criticize institutions for their regulatory shortcomings through reports of examinations. These steps often prevent more serious compliance problems. The OCC also relies on informal enforcement efforts, such as supervisory letters, to remedy successfully supervisory concerns. Although we often address supervisory concerns informally, the OCC is fully committed to bringing formal enforcement actions whenever appropriate. When a bank fails to comply with previous OCC directives or respond to examination criticisms, or engages in a serious violation of law or unsafe and unsound practice, formal enforcement actions are particularly appropriate to remedy improper practices or violations and impose proper penalties.

Since 1983, the OCC has brought 67 formal actions against national banks for violations of the federal securities laws (see Attachment E). This total does not include informal actions that the OCC often has taken to correct federal securities law violations that it uncovers through its supervision of national bank securities activities. The attached list represents our best efforts at full disclosure but we may have undercounted the number of actions brought.

The OCC has brought seven actions against national banks for municipal securities-related violations and 33 actions for government securities-related violations. The OCC has brought five actions for transfer agent-related violations. The other 34 actions found in our review of enforcement records include actions brought for violations of anti-fraud, reporting, proxy, tying, and beneficial ownership provisions of the federal securities laws.

You have also requested that we comment on the OCC's authority to bring enforcement

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actions, with reference to a table describing the SEC's administrative sanctions and persons subject to them. We believe that the OCC authority to address violations of law under our jurisdiction, pursuant to both the federal securities laws and federal banking laws, is at least comparable to that of the SEC. The OCC is empowered to bring the same actions under the federal securities laws as the SEC in many circumstances, e.g. municipal securities dealers, government securities brokers and dealers, transfer agents, and national banks subject to Section 12(1) of the 1934 Act. The OCC is also empowered pursuant to 12 U.S.C. § 1818 to sanction violations of any securities laws, such as the anti-fraud provisions, applicable to institutions and individuals under our jurisdiction. The OCC additionally uses Section 1818 to enforce banking regulations governing securities activities of banks, including 12 C.F.R. Parts 9 and 12.

Finally, the OCC possesses plenary authority under Section 1818 to sanction any unsafe or unsound banking activity, including securities activities, by institutions and individuals subject to our jurisdiction. This exceptionally broad grant of authority does not have a parallel under federal securities laws. With respect to the sanctions referenced for selfregulatory organizations in the SEC's table, it should be noted that the OCC does not rely on industry associations to enforce banking laws and regulations. Through our staff of nearly 3,000 bank examiners, we take direct responsibility for supervision of bank activities, including securities activities, and directly sanction improper conduct.

The sanctions available to the OCC under Section 1818 include cease and desist orders, orders of restitution, civil money penalties, and removals and suspensions of individuals. The Securities Enforcement Remedies and Penny Stock Enforcement Act of 1990 ("1990 Act") reinforced the SEC's enforcement ability by providing the SEC with remedies for violations of federal securities laws that were modelled after the sanctions long available to federal banking regulators under Section 1818. The legislative history of the 1990 Act notes that the new authority granted to the SEC was based on powers that were already available to the federal banking agencies. H.R. Rep. No. 101-616, 101st Cong., 2d Sess., 15-16, 23 (1990), reprinted in 1990 U.S.C.C.A.N. 1382-83, 1390.

6c.

What rules does the OCC have with regard to the rights of aggrieved individuals in connection with bank securities activities? Is it the OCC's position that the National Bank Act preempts the application of the federal securities laws? What is the OCC's view on Simpson v. Mellon Bank (E.D. Pa. 1993)?

There are a number of ways for aggrieved individuals to seek redress for any injury resulting from securities activities at national banks or their subsidiaries or affiliates: arbitration, private rights of action, and complaints to the OCC. Many registered subsidiaries or affiliates provide an arbitration clause in their standard investment account contracts. Banks that directly sell securities also may enter into arbitration agreements with customers.

Bank customers also may institute litigation alleging a violation of the anti-fraud provisions of the federal securities laws. Courts have long recognized an implied private right of action