March 17, 1994
TO: BANK INVESTMENT MANAGEMENT MEMBERS NO. 13-94
BOARD OF GOVERNORS NO. 26-94
INSTITUTIONAL FUNDS COMMITTEE NO. 8-94
RE: OCC GUIDANCE TO EXAMINERS ON MUTUAL FUND AND OTHER
NONDEPOSIT SALES
__________________________________________________________
The Office of the Comptroller of the Currency recently issued guidance
to its examiners on the sale of mutual funds and other nondeposit products.
The OCC's circular is more detailed than the Interagency Statement on bank
sales of nondeposit products that the federal banking agencies recently
released. Copies of the OCC's circular and press release are attached, and
portions of the circular are summarized below.
1. Reliance on NASD Rules; Suitability
The circular states that the NASD's Rules of Fair Practice are an
appropriate reference for compliance, training, advertising and suitability
standards. The circular states that a well-documented suitability inquiry can
protect a bank from dissatisfied customers who threaten litigation, and the
OCC may view banks that do not have appropriate suitability procedures to be
engaging in an unsafe and unsound practice.
If the examiner determines that customers may have been disadvantaged by
unsuitable recommendations, the examiner should discuss appropriate corrective
action, including a full explanation to customers and an offer to rescind the
trade, an independent audit, or other action agreed upon with the bank.
2. Common Names
Banks may not offer nondeposit investment products with a name identical
to the bank's name and examiners should "criticize" sales programs in which
fund names are so similar that even mitigating circumstances are unlikely to
eliminate customer confusion.
The potential for customer confusion arising from similar names can
depend on the context in which the sales are taking place. For example, it
may be inappropriate for the First National Bank to offer a fund named "FNB
Money Market Fund" if the bank also
offered an insured deposit product named "FNB Money Market Account."
3. Disclosure
Examiners should determine that banks conspicuously disclose that
noninsured 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. This disclosure must be included in, among other things,
confirmations and periodic statements that include the name or logo of the
bank or an affiliate. Examiners also should determine whether a sales program
includes any representation concerning SIPC or other insurance.
Claims about "no fees" or "no charges" are inaccurate if the bank
collects fees for investment advisory or shareholder services. In such a
case, the bank could claim that there are no "sales" charges and inform
readers that a description of other charges is contained in the prospectus.
4. Fiduciary Accounts
The principles under OCC Rule 9.12 and ERISA, governing the purchase for
fiduciary accounts of securities of an organization with which there exists
certain relationships, apply to the purchase of bank-advised mutual funds and
private label funds. The purchase and retention of these funds for fiduciary
accounts must be appropriate for each account.
5. Selection of Mutual Funds
The circular provides a discussion of how products are selected by
"well-managed banks." The circular states that as "a general practice" banks
offer at least one money market fund, a U.S. government bond fund, an equity
fund, and a tax-exempt bond fund. When deciding which funds to offer,
managers generally select funds according to (among other things) the
stability of asset values over time, yield, specialized ratings or rankings,
net asset value versus total return, expenses, and turnover. Bank management
also must consider the issuer's contingency plans for handling unusual surges
in redemptions.
Paul Schott Stevens
General Counsel
Attachment