1 See Memorandum to Board of Governors No. 63-93, Bank Investment
Management Members No. 16-93, and Task Force on Bank Sales
Activities, dated July 21, 1993.
2 See Memorandum to Board of Governors No. 79-93, Bank Investment
Management Members No. 22-93, and Task Force on Bank Sales
Activities, dated September 15, 1993 [OTS]; Memorandum to Board of
Governors No. 62-93, Bank Investment Management Members No. 15-93,
Task Force on Bank Sales Activities, dated July 19, 1993 [OCC];
Memorandum to Bank Investment Management Members No. 13-93 and
Board of Governors No. 57-93, dated June 25, 1993 [Federal
Reserve].
1
October 25, 1993
TO: BANK INVESTMENT MANAGEMENT MEMBERS NO. 25-93
BOARD OF GOVERNORS NO. 96-93
RE: FDIC GUIDANCE ON THE SALE OF MUTUAL FUNDS
__________________________________________________________
The Federal Deposit Insurance Corporation recently issued a supervisory
statement to alert state non-member banks of "prominent safety and soundness
concerns and other possible issues" arising from the sale of mutual funds and
annuities. As we previously informed you, the Institute recently submitted
proposed guidelines on bank mutual fund activities to the federal banking
agencies.1 The Office of Thrift Supervision, the Office of the Comptroller of
the Currency and the Federal Reserve Board have issued statements on this
subject.2 A copy of the FDIC's supervisory statement is attached.
The supervisory statement advises that banks should implement control
procedures, including written policies and procedures, to address the risk of
potential customer confusion regarding the nature of mutual funds and annuities,
and the risk of mismanagement of sales programs for these products. The
statement specifically addresses the following areas:
1. Disclosure
Customers should receive disclosure "that mutual funds and annuities are
not bank deposits, are not insured by the FDIC, and
are not guaranteed by, or obligations of, the bank." The investment risks
should be disclosed, "including the potential for fluctuations in investment
return and the possibility of loss of some or all of the principal investment."
The disclosure should be included in oral sales presentations, in writing before
any investment decision is made and an account is opened, and in all
advertisements. Joint advertising and combined account information should
clearly segregate information regarding deposits from information on nondeposit
investments.
According to the FDIC's statement, customer confusion also could arise from
the use of names for nondeposit instruments that are similar to the bank's name,
but in most instances the required disclosure should permit customers to
2distinguish deposits and investment products. If a bank or its affiliate serves
as mutual fund adviser, customers should receive written disclosure to that
effect.
2. Customer Confusion
The area in which mutual funds and annuities are sold should be clearly and
prominently identified to distinguish those activities generally from traditional
deposit-taking activities. Tellers and other employees involved in deposit-taking
activities generally should be prohibited from selling investment products and
from offering investment advice. Bank employees should clearly inform customers
when they are acting on behalf of third-party vendors.
3. Management and Administration of Sales Programs
The bank should have written policies and procedures addressing the
selection criteria for nondeposit investments, the use of bank customer
information for marketing, and the administration and supervision of the sales
program.
4. Qualifications and Training
Training should be provide to all bank employees with direct customer
contact and compliance and audit staff. Training of sales personnel should
emphasize product knowledge and customer protection requirements. Employees
should know the difference between FDIC coverage and coverage through the
Securities Investor Protection Corporation.
5. Customer Suitability
If the bank recommends nondeposit products, salespersons must make
suitability determinations and appropriate documentation should be maintained to
reflect those determinations.
6. Other Issues
Employee referral programs should be based solely on referrals and not on
completion of sales. "Sales of mutual funds . . . to related trust department
accounts should be allowed only if they are consistent with the bank's
obligations as a fiduciary and meet the criteria of the bank's policies governing
trust documents and applicable law."
Paul Schott Stevens
General Counsel
Attachment