December 29, 1993
TO: BANK INVESTMENT MANAGEMENT MEMBERS NO. 37-93
BOARD OF GOVERNORS NO. 116-93
SUBCOMMITTEE ON ADVERTISING NO. 22-93
RE: NASD NOTICE TO MEMBERS CONCERNING REINVESTMENT OF MATURING
CSs IN MUTUAL FUNDS
__________________________________________________________
The NASD recently published the attached Notice reminding its members,
"particularly members affiliated with banks or participating in bank networking
arrangements," of their obligations under the Rules of Fair Practice to disclose
to customers the varying risks of investing the proceeds of deposits in a
security, such as a mutual fund.
The Notice reminds all members "that they are subject to the full scope of
NASD regulations." The Notice is designed in part to prevent investor
misunderstandings that could lead to violations of NASD rules and regulations.
According to the Notice, "NASD regulatory staff will be examining all members,
including those who are bank affiliates and who are providing networking
arrangements for banks, for compliance with such regulations."
The Notice states that members should provide, at a minimum, the following
disclosure to customers in connection with mutual fund investment alternatives:
- for money market funds -- although fund managers strive to maintain
a stable net asset value, such funds are not federally insured and
there is no guarantee that a stable net asset value will be
maintained;
- for fixed-income funds -- although such funds may pay higher rates
than CDs, their net asset values are sensitive to interest-rate
movement and a rise in interest rates can result in a decline in the
value of the customer's investment; and
- for equity funds -- there is a higher degree of risk to capital
associated with these funds.
The Notice states that many first-time investors may use the services and
products provided by a broker-dealer affiliated with a bank. For this reason,
it states that these NASD members have "a higher level of responsibility" to
ensure that investors understand the differences between deposit products offered
by the bank and investments offered by the broker-dealer, and to ensure that
suitability and supervision standards are strictly followed. It reminds members
that they must have procedures requiring registered persons to reiterate to
customers "in all oral and written communications" the material differences
between bank instruments and securities.
The Notice also states that bank affiliated members and members
participating in bank networking arrangements must be particularly sensitive to
the potential for customer confusion about mutual fund purchases made at bank
branch locations. Advertising and sales presentations should disclose that
mutual fund shares purchased through banks "are not deposits or obligations of,
or guaranteed by, the bank and are not federally insured or otherwise guaranteed
by the federal government." Members may wish to obtain signed acknowledgements
from their customers that they have received and understand these disclosures.
Members should provide customers these disclosures on an annual basis.
The Notice states that members should advise their affiliates that
unregistered bank employees should provide similar disclosures when they discuss
with customers the reinvestment of CDs in mutual funds, and should review the
activities of unregistered employees to ensure that they do not require NASD
registration. Members also should advise their affiliates to use appropriate
signs or labels near the investment area to distinguish the operation from the
bank's traditional deposit-taking functions.
We will continue to advise you of developments in this area.
Paul Stevens
General Counsel
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