Guidelines from Comptroller's Office for bank sales of investment products.

In a long-awaited move, the Office of the Comptroller of the Currency last week issued guidelines for national banks that sell mutual funds, annuities, and other uninsured investment products.

The message was clear: Banks must design their investment programs to make sure that customers understand the risks of investing.

Banks and their directors will be held accountable for monitoring these programs, whether administered by the bank itself or by a third-party marketing firm.

Generally, the Comptroller's office said, banks should follow the National Association of Securities Dealers' Rules of Fair Practice.

But the agency elaborated on those rules in an attempt to tailor them to the "particular circumstances surrounding bank-related sales of nondeposit investment products."

Following are excerpts from the Comptroller's guidelines.

A. Program management

Banks should adopt a statement describing the features of the sales program, the roles of bank employees, and the roles of third-party entities. At a minimum, this statement should address the following issues:

* Supervision of personnel involved in nondeposit investment sales programs. Senior bank managers will be expected to ensure that specific individuals employed by the bank, an affiliated broker-dealer, or a third-party vendor are responsible for each activity outlined in the bank's investment sales policy.

* The roles of other entities selling on bank premises, including supervision of selling employees. Bank management must plan to monitor compliance by other entities on an ongoing basis.

The degree of bank management's involvement should be dictated by the nature and extent of nondeposit investment product sales, the effectiveness of customer protection systems, and customers' responses.

* The types of products that the bank will sell. For each type of product sold by bank employees, the bank should identify specific laws, regulations, regulatory conditions, and any other limitations or requirements, including qualitative considerations, that will expressly govern the selection and marketing of products the bank will offer.

* Policies governing the permissible uses of bank customer information. Such policies should address the use of bank customer information for any purpose in connection with a bank-related retail investment sales activity.

B. Setting and circumstances of retail nondeposit investment sales

Banks should market nondeposit products in a manner that does not mislead or confuse customers as to the nature of the products or the risks.

To avoid customer confusion about these products, bank policies should specifically address the locations at which sales will take place. To the extent permitted by space and personnel considerations, bank management should take steps to separate the retail deposit-taking and retail nondeposit-sales functions.

Banks should prohibit tellers from offering investment advice. In addition, the OCC strongly discourages employees who accept retail deposits from selling retail nondeposit investment products.

If the bank permits an employee to perform both functions, the bank should disclose this dual role to customers.

In addition, banks may not offer uninsured retail investment products with a product name identical to the bank's name.

Banks should also recognize that the potential for customer confusion may be increased where the bank uses uninsured product names that are similar to the bank's own, and should design their sales training to minimize this risk.

C. Disclosures and advertising

Complete and accurate disclosure must be provided to avoid customer confusion as to whether a bank-related product is an investment product or an insured bank deposit.

When selling, advertising, or otherwise marketing uninsured investment products to retail customers, the following product disclosures should be made conspicuously:

The products offered (1) are not FDIC insured; (2) are not obligations of the bank; (3) are not guaranteed by the bank; and (4) involve investments risks, including the possible loss of principal.

The OCC believes it is appropriate to obtain a signed statement acknowledging such disclosures from customers at the time a retail nondeposit investment account is opened.

For accounts established prior to the issuance of this circular, the bank should consider obtaining such a signed statement prior to the next sale.

These disclosures also should be featured conspicuously in all written or oral sales presentations, advertising and promotional materials, prospectuses, and periodic statements that include information on both deposit and nondeposit products.

The bank should review bank-related sales advertisements to ensure that they are accurate, do not mislead customers about the nature of the product, and include required disclosures.

Where applicable, the bank should disclose:

* The existence of an 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.

D. Suitability

Consistent with the Rules of Fair Practice, the OCC expects banks to determine whether a product being recommended is an appropriate investment for the customer.

Banks should ensure that any salespeople involved in bank-related sales obtain sufficient information from customers to enable the salesperson to make a judgment about the suitability of recommendations for particular customers.

At a minimum, suitability inquiries should be made and responses documented consistent with the Rules of Fair Practice concerning the customer's financial status, tax status, investment objectives, and other factors that may be relevant prior to making recommendations to the customer.

E. Qualifications and training

Banks should ensure that sales personnel are properly qualified and adequately trained to sell all bank-related nondeposit investment products. Bank management should consider securities industry or other professional qualification training as an appropriate reference.

Banks should implement training programs to ensure that sales personnel have thorough product knowledge (as opposed to simple sales training for a product) and understand customer protection requirements.

Background inquiries about new bank sales employees with previous securities industry experience should include a check of possible disciplinary history with securities regulators.

F. Compensation

Bank management should ensure that compensation programs do 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 such compensation on the success of the sale.

G. Fiduciary accounts

Banks must comply with all applicable state and federal restrictions on transactions involving the bank's fiduciary accounts.

For example, pursuant to 12 CFR 9.12, national bank fiduciaries are restricted from using the bank's own brokerage service, or any other entity with which the bank has a conflict of interest, to conduct fiduciary transactions without express authorization in the governing trust documents, under local law, a court order, or without informed consents from all beneficiaries.

Similar restrictions govern purchases of a bank's proprietary and other products for fiduciary accounts where a conflict of interest arises.

If so authorized, bank trust departments are reminded that they must conduct a regular and reasonable periodic review of the continuing prudence of holding the product for a fiduciary account.

Banks also should comply with any applicable provisions of the Employee Retirement Income Security Act of 1974, including it prohibited-transaction provisions.

H. Compliance program

Banks must maintain compliance programs capable of verifying compliance with the guidelines specified in this circular and with any other applicable requirements.

The compliance function should be performed independently of investment product sales and management.

At a minimum, the compliance function should include a system to monitor customer complaints and to review periodically customer accounts to detect and prevent abusive practices.

Supervision

The OCC will continue to include a review of compliance with all applicable requirements including those in this circular, in its supervision of national banks involved in retail sales of investment products. The guidelines take effect immediately.

Questions on the content of this circular may be submitted to the Office of the Chief National Bank Examiner, Capital Markets Group,. Washington, D.C. 20219.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER