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

Section 413.3

Responses to criticisms in previous audit/compliance and examination reports.

Program Management

3. Determine the extent of management involvement in the operation, and the quality of management of the retail nondeposit investment sales program. Review:

Responses to the Program Management section of the ICQ.

• Resumes of key officials involved in the management of the sales program to determine their experience and tenure with the bank. Written performance objectives and performance appraisals of key management personnel to determine whether objectives and appraisals incorporate compliance issues, particularly compliance with disclosure and customer protection standards.

Reports furnished to senior management and the board of directors to determine whether they are sufficiently timely, accurate and meaningful to permit effective oversight.

4. Review senior management's actions in implementing the retail nondeposit investment sales program and in offering any new products. Specifically determine whether bank management:

Participated in the development of the bank's investment sales program strategic plan.

• Conducted a risk and regulatory assessment and adopted a compliance program directed at ensuring compliance with all applicable laws, rules, regulations, regulatory conditions, and the Interagency Statement's guidelines.

• Provided for internal audit/compliance participation in the development of the program.

• Adopted a program management statement aimed at ensuring effec

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tive supervision of the individuals engaged in sales activities - whether they are employees of the bank or of another entity involved in bank-related sales of investment products.

5. Determine how the retail nondeposit investment sales program is managed. a. Analyze sales program growth and earnings performance and determine why certain products have high levels of performance. Consider how this performance relates to incentive compensation and the suitability of recommendations to customers.

b. Review the customer mix and market surveys. Look at trends in identifiable classes of customers and be alert for concentrations by types of customers. Also, try to determine whether customers are viewed as one-time buyers or are being cultivated to establish longer term relationships.

c. Review the products offered and any market surveys and determine the risk inherent in different products. Consider whether management has attempted to match products to investors' needs in general.

d. Review projections for the sales program and for different products and determine whether they:

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Are realistic in light of the bank's customer mix;

Relate to bank staffing and training plans for the sales, supervision, and compliance functions; and

- Are consistent with the bank's

overall strategic plan.

e. Determine the effectiveness of the bank's self-regulatory policies and procedures as measured by the number and type of customer complaints and by responses to the Ica.

Product Selection

Section 413.3

6. Assess the adequacy of management processes to select and review products sold. Review:

Responses to the Product Selection section of the ICQ.

• Methods bank management uses to select products to meet customer needs.

• Management's comparison of the performance of the products they offer to general market products with similar objectives.

7. Discuss your findings from the product selection review with senior management and make a judgement about the appropriateness of management's decision to continue to offer these products.

Use of Customer Information

8. Determine whether policies governing the permissible uses of bank customer information address the steps to be taken to reduce possible confusion among depositors who are being solicited to purchase nondeposit investment products.

Setting and Circumstances of Sales

9. Determine whether bank management has established effective controls to distinguish retail deposit-taking activities from retail nondeposit investment sales. Consider how the various elements of the setting and circumstances may interact to influence the customers' perception.

10. Where the deposit-taking and securities sale functions are performed by the same personnel, determine if the bank uses appropriate written and oral disclosures to guard against customer confusion, and the extent to which bank staff is trained to use, and does use, such disclosures.

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

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

c. Determine whether bank-related sales advertisements are:

Suitability

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

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 unse 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.

Compensation

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 salescarsons 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,