As more and more banks venture into the sale of investment products, they are facing regulatory examinations of their sales programs for the first time.
Criticism by banking regulators as a result of these examinations has surprised many banks. But careful preparation for regulatory examinations can save embarrassment - or worse - when the examiners arrive.
The Interagency Statement on Retail Sales of Nondeposit Investment Products adopted by federal banking regulators sets out some important distinctions for banks to remember when marketing nondeposit investments compared with FDIC-insured deposits.
Knowing what to expect when the examiner walks in can help banks avoid difficulties. Here are a few suggestions, based on the experience of banks in the regulatory examination:
Review the examination guidelines and examiners' checklists. Examination guidelines for nondeposit investment sales programs, published by each banking agency, should be carefully reviewed at least 30 days before the examination. The banking agencies will also provide a pre-examination checklist in advance of the examination highlighting the most important documents and issues to be addressed.
Rely on mystery shopping, the practice of having individuals masquerade as customers to test brokers. If a consistent pattern of misinformation or lack of understanding is found, immediate remedial action can be taken before the examination.
Segregate investments from deposits. The first action the examiner will take is to inspect the bank branch to determine if the setting for selling investments is properly segregated from the deposit-taking area. The examiner will also check on whether advertisements for investment products are separate from FDIC-insured deposit materials and those for other banking services.
Retrain tellers and platform personnel about distinctions between FDIC- insured and non FDIC-insured investment products. The examiner will usually question these workers to test their knowledge of investment sales. Wrong answers by tellers will immediately turn a routine examination into a serious matter. The referral form used by tellers or platform bankers will also be examined to make sure it does not appear to be a pre-qualification of the customer.
Make mandatory disclosures prominent. The examiner will carefully review all marketing and advertising materials to make sure mandatory disclosures are prominent- even though the banking agencies lack consistency on the exact definition of prominenced. This means the disclosure information should be on the cover, or in bold or red type.
Participate in the establishment of suitability standards. Many banks have passed off the handling of suitability standards to their third-party brokers, but the examiner will want evidence that the banks and their boards are involved - they need to maintain documentary evidence that those standards are applied in the investment sales process.
Monitor mutual fund ratings. The examiner will check marketing materials to make sure that the bank's criteria for investment products are being met. For example, if a rating service has downgraded an investment product, all lists of funds and marketing materials must be updated to reflect the current rating.
Set up an ongoing compliance program. The best way to ensure that a regulatory examination will be successful is to establish an ongoing comprehensive compliance program that regularly reviews and audits the bank's sales program.
Prepare a procedures manual. Examination problems can be avoided by preparing a bank procedures manual in advance, documenting the bank's intentions on compliance and demonstrating how the overall program will be managed and overseen by the bank's management and board.
Mr. Rockett is in charge of the financial institutions practice group at San Francisco law firm Ropers, Majeski, Kohn & Bentley.
