The Federal Deposit Insurance Corp. is warning banks to step up oversight of their mutual fund and annuity programs.
Banks that mismanage investment product programs could face backlash from customers and federal securities regulators, the FDIC said in a supervisory statement issued to banks.
With the announcement last week, the FDIC became the last of four federal bank and thrift regulatory agencies to issue detailed guidelines on bank mutual fund and annuity activities.
Risk to Banks Emphasized
The Federal Reserve Board and the Office of the Comptroller of the Currency issued their guidelines in the summer, and the Office of Thrift Supervision followed earlier this fall.
The FDIC's five-page statement is similar in many respects to guidelines issued by the other regulators, though it is somewhat sterner in tone.
The FDIC emphasizes that banks could put their well-being on the line if they don't manage mutual fund activities carefully.
Banks must "protect themselves from liability that may affect [their] overall safety and soundness," said the FDIC, which regulates thousands of state banks that do not belong to the Federal Reserve System.
Proof of Coverage
In a significant twist, the FDIC said banks must get "written assurance" from their blanket-bond insurance carriers that they have sufficient coverage against liability claims. Disgruntled investors could bring such claims against bank employees and employees of outside marketing companies that sell investment products in branches, the FDIC noted.
The agency also said that securities sales representatives must sound out customers about their financial condition and investment objectives before recommending investments.
The FDIC said this information "should be updated periodically," suggesting that banks will have to call customers in on a regular basis to ensure that their investment is still appropriate.
Caveats on Marketing
The agency cautioned banks not to push customers into mutual funds and annuities when low-yielding certificate of deposits come due. Marketing efforts that target CD customers "can lead to abuse and therefore are of special concern to the FDIC."
The standards also state that deposit-taking employees generally should be prohibited from selling investment products and from offering investment advice."
The FDIC's careful use of the word "generally" allows some leeway, said Melanie Fein, a partner with Washington law firm of Arnold & Porter. The flexibility will be especially important at smaller banks with limited staffs, she said.
The Naming Issue
The FDIC standards skirt one of the hottest issues -- the growing practice among banks of giving their mutual funds names that are similar to their own.
The OCC and the Fed have frowned on this practice.
"I don't think that issue has come up directly with the FDIC," said examination specialist Curtis L. Vaughn. "The policy statement is meant to leave some leeway."
The FDIC standards are effective immediately, although it will take a few weeks for examiners to receive copies, Mr. Vaughn said. FDIC examiners will use the standards during their regular safety-and-soundness reviews. Banks found to be lacking will be subject "to criticism and required corrective action," the agency said.
Taking It in Stride
At least one FDIC-regulated bank sees little if any fallout from the new guidelines.
"We don't find any difficulty. because we've been very concerned with the appropriateness of these products for our customers," said Peter Succoso, senior vice president of investment management at Wilmington Trust Co. in Delaware. The $4 billion-asset company markets its own mutual funds as well as others.
The independent Bankers Association of America is also optimistic that its membership of small banks can live with the FDIC standards. "I think our banks will be able to comply with them," said Diane Casey, executive director.
