March 18, 1993
TO: BOARD OF GOVERNORS NO. 19-93
BANK INVESTMENT MANAGEMENT MEMBERS NO. 2-93
MEMBERS - ONE PER COMPLEX NO. 22-93
RE: RESPONSES TO CHAIRMAN DINGELL CONCERNING BOND INVESTMENTS
__________________________________________________________
As we previously informed you, Energy and Commerce
Committee Chairman John Dingell had written to the Office of the
Comptroller of the Currency, the Securities and Exchange
Commission, and the National Association of Securities Dealers,
requesting information concerning the sale of bond funds and
other bond investments. (See Memorandum to Board of Governors
No. 3-93 and to Members - One Per Complex No. 3-93, dated January
13, 1993; Memorandum to Bank Investment Management Members No. 1-
93, dated February 1, 1993.) In response, the OCC, SEC, and NASD
recently delivered the attached letters to Chairman Dingell.
OCC Letter
The OCC generally stated that it shares Chairman Dingell's
concerns, but that it "has no reason to believe that the level of
supervision of employees of broker-dealers that sell securities
on bank premises is less rigorous than the level of supervision
applicable to an employee of any other registered broker-dealer."
The OCC emphasized that most sales of non-deposit investment
products on bank premises are made by employees of SEC-registered
broker-dealers. The OCC has advised banks (1) to segregate the
sale of investment products from the bank's deposit-taking
function and to discourage sales through teller windows and (2)
to conspicuously disclose that investment products are neither
bank obligations nor FDIC-insured. The OCC intends to issue a
more generalized policy statement with respect to investment
products sold on bank premises.
SEC Letter
The SEC emphasized that banks are not subject to
registration as broker-dealers and that bank personnel are not
subject to self-regulatory organization testing or discipline.
Banks and bank personnel are subject to the SEC's basic antifraud
rules, which the SEC will enforce to protect investors
reinvesting CD proceeds. An attached memorandum from the SEC's
Division of Market Regulation discusses, among other things, the
prospectus disclosure requirements applicable to mutual funds in
which CD proceeds are invested. The SEC memorandum also notes
the Institute's development of public information programs
relating to bond funds and other mutual funds.
NASD Letter
The NASD stated that its members must disclose that while
higher yields may be realized on a bond fund, the customer's
capital is exposed to a risk not present in a CD. The NASD
discussed specific steps it has taken to alert members about
sales practice issues relating to the reinvestment of CD
proceeds. The NASD also has recommended standards for CMO
advertising and requires prefiling of all CMO advertisements.
The NASD noted that NASD members cannot (1) participate in
commission splitting or referral fee arrangements with an
unregistered bank employee or (2) allow any person to engage in
any sales or solicitation activities on behalf of the member
unless the person was appropriately registered with the member.
Chairman Dingell's Press Release
Chairman Dingell released these letters with a press
release announcing that the Committee will "beef up its oversight
of this and related areas and, if necessary, pursue legislation
to ensure that sales personnel are fully aware of and in
compliance with applicable disclosure requirements." A copy of
the press release is also attached.
We will keep you informed as these matters develop.
Matthew P. Fink
President
Attachments