July 19, 1993
TO: BANK INVESTMENT MANAGEMENT MEMBERS NO. 15-93
BOARD OF GOVERNORS NO. 62-93
TASK FORCE ON BANK SALES ACTIVITIES
RE: OCC GUIDANCE ON THE SALE OF MUTUAL FUNDS AND OTHER
NONDEPOSIT PRODUCTS
__________________________________________________________
The Office of the Comptroller of the Currency recently issued a guidance
circular to national banks on the sale of nondeposit investment products,
including mutual funds. The OCC's circular and press release are attached.
1. Bank Responsibilities
The circular applies to bank-related retail sales of nondeposit investment
products (such as mutual funds), including sales by bank employees, sales by
nonemployees on bank premises (including telephone sales and mailings from bank
premises), and sales from customer referrals when the bank receives a benefit for
the referral. The circular requires bank directors to evaluate the risks posed
by these sales and to adopt self-regulatory policies and procedures to ensure
compliance with the law and the circular. The circular states that the NASD's
Rules of Fair Practice are an appropriate reference in constructing a compliance
program for bank-related sales by non-NASD members. The circular also states
that the OCC's examination authority covers all bank-related retail sales
operations, including sales by other entities.
2. Program Management
The circular encourages banks to adopt a sales program statement, which,
at a minimum, should address (1) the supervision of personnel involved in the
sales program; (2) the role of other entities selling on bank premises, including
supervision of selling employees; (3) the types of products sold, and (4)
policies governing the permissible uses of bank customer information.
3. Setting of Retail Nondeposit Sales
The circular encourages bank management to take steps to separate the
retail deposit-taking and retail nondeposit sales functions. Banks should
prohibit tellers from offering investment advice and the OCC strongly discourages
employees who accept retail deposits from selling retail nondeposit investment
products. If an employee performs both functions, the bank should disclose this
dual role to customers. Banks may not offer uninsured retail investment products
with a product name identical to the bank's name.
4. Disclosures and Advertising
When uninsured investment products are sold or marketed to retail
customers, there must be conspicuous disclosure that the products are not FDIC
insured or obligations of or guaranteed by the bank, and that they involve
investment risks including the possible loss of principal. The circular states
that it is appropriate to obtain signed customer acknowledgements of such
disclosure when the nondeposit investment account is opened. These disclosures
should be featured conspicuously in all written or oral sales presentations,
advertising, prospectuses, and periodic statements that include information on
both deposit and nondeposit products. The bank also should disclose any advisory
or other relationship between the bank and any affiliate involved in providing
the nondeposit investment product and the existence of any early withdrawal
penalties, surrender charge penalties, and deferred sales charges.
5. Suitability; Training; Compensation
At a minimum, suitability inquiries should be made and responses documented
consistent with the NASD's Rules of Fair Practice. Sales personnel should be
properly qualified and adequately trained to sell all bank-related nondeposit
investment products; securities industry or other professional qualification
training are appropriate references. Compensation programs should not operate
as an incentive for salespeople to sell retail nondeposit investment products
over a more suitable option. If tellers participate in referral programs that
include compensation features, banks should not base the compensation on the
success of the sale.
6. Fiduciary Accounts; Compliance Program
Banks must comply with all applicable state and federal restrictions on
transactions involving the bank's fiduciary accounts. At a minimum, compliance
programs should monitor customer complaints and review periodically customer
accounts to detect and prevent abusive practices.
Thomas M. Selman
Assistant Counsel
Attachment