Starting June 1, Federal Deposit Insurance Corp. examiners will spend less time scrutinizing how 6,500 banks sell investment products.
Under new exam procedures for certain state banks, examiners will follow a two-tier system for inspecting sales of mutual funds, annuities, and other uninsured investment products. The core, or basic, exam assesses five general areas, such as customer disclosures and employee qualifications. If no problems crop up, the exam is over.
"This is going to be much less intrusive, because if you pass muster in the core exam, that's it," said Karen M. Thomas, director of regulatory affairs for the Independent Bankers Association of America.
"It's about time examiners spend less time on things like investment products," added B.A. Donelson, president and chief executive of the $112 million-asset First State Bank, Stratford, Tex. "I could get in a lot of trouble for bad loans, but how many banks are you going to close because of the way they sell mutual funds and annuities?"
The five areas assessed are:
Qualifications of sales personnel and the structure of compensation programs.
Adequacy of customer disclosures.
The physical separation of investment products sales from and loan and deposit-taking areas.
Evaluation of a customer's financial conditions and investment goals to determine suitability.
Independent audit procedures.
If examiners find weaknesses in any of these five areas, they can take a closer look. For example, if they believe a bank is making inadequate disclosures, examiners may review individual account files to find out what employees told customers.
Under the new procedures, however, examiners will delve deeper only into areas where problems were found.
"In the old exams, examiners evaluated each of these five areas, but if there was a lack of compliance in one area, they would tend to expand the whole exam," said William A. Stark, the FDIC's assistant director of supervision. "Now they will just home in on the specific area where they find a weakness.
"We think this will allow us to keep burden down and still be effective," he added.
The 23-page exam guidelines cautioned examiners to "implement only the expanded procedures that address specific areas of weakness, concern, or potential risk."
The FDIC also is instructing its examiners to do more advance work. Before an exam begins, examiners will review the bank's written policies on nondeposit investment product sales, its agreements with third parties, and any complaints lodged by customers.
The FDIC has streamlined its interest rate risk exams in a similar fashion. The new exams, which began in December, range from simple to complex depending upon a bank's internal controls and the amount of interest rate risk it faces.
As it did for the new interest rate risk exams, the agency will conduct 10 educational seminars on the new exams. The seminars, which will take place across the country, will run from May 28 through July 2.
