In an Aug. 4 article in the American Banker, Mr. Kurucza analyzed the impact of the Office of the Comptroller of the Currency's new guidelines for bank mutual fund sales. In this article, he discusses specific points that banks should address inthe investment-product program statements that the Comptroller's office requires.
The OCC guidelines stress that national banks should market investment products in a manner that does not mislead or confuse customers as to the nature of the products or the risks involved.
Bank policies should specifically delineate the locations at which sales will occur. The guidelines contemplate that bank management will take steps to separate the retail deposit-taking and retail investment product sales functions.
Tellers are specifically prohibited from giving investment advice to customers. It is unclear whether tellers can process "passive" sales transactions, such as requests by a customer to redeem shares in a mutual fund sold by the bank.
Banks are also strongly discouraged from allowing employees who accept retail deposits to concurrently sell retail investment products. If an employee engages in both activities, this dual role must be disclosed.
It is not certain whether the guidelines are meant to prohibit a bank employee who sometimes works at a teller station from giving investment advice while functioning in an investment products sales role.
The OCC guidelines allow national banks to market investment products that have names that are similar, but not identical, to the bank's name.
If a product name is similar, the bank must have sales training that minimizes the risk of customer confusion as to whether the product is FDIC-insured.
Assuming that a national bank meets the sales training condition, it will be able to sell mutual funds, including proprietary funds, that have names similar to the bank's.
There are numerous examples today of national banks offering proprietary funds with arguably similar names to the bank advising the fund. Incorporating the adviser's name in some fashion in a fund's name is common in the mutual fund industry.
Most of these banks already have sales training programs which emphasize that shares in the funds are not FDIC insured.
When coupled with the required disclosures described below (which are already prevalent in connection with bank investment product sales activities), the combination of the prophylactic measures should be effective tive in avoiding any possible customer confusion.
It should be noted that the Federal Reserve Board is of the view that mutual funds advised by a bank holding company or a nonbank subsidiary may not have a name that is similar to that of the holding company or any of its subsidiary banks, regardless of any disclosures intended to minimize confusion.
Moreover, the Fed prohibits employees of state-chartered member banks who accept retail deposits from offering investment advice concerning investment products.
Spelling Out the Risks
When selling, advertising, or otherwise marketing uninsured investment products to retail customers, the Comptroller's guidelines require national banks to disclose conspicuously that the products offered are not FDIC-insured, are not obligations of the bank, are not guaranteed by the bank, and involve investment risks, including possible loss of principal.
Additionally, where relevant, the bank should disclose the existence of an advisory or other relationship between the bank and any affiliate involved in providing the investment product, and the existence of any early withdrawal penalties, surrender charges penalties, or deferred sales charges.
It is difficult to imagine any banker quibbling about the desirability of these disclosures from a "safety and soundness" standpoint. In fact, knowledgeable bankers have been making such disclosures for years. Thus, many banks already engaged in these activities will find they have to make few if any changes in their disclosures.
The Securities and Exchange Commission also recently directed banks to print a boldface legend on prospectuses for proprietary mutual funds, alerting investors to the funds' uninsured status.
The Comptroller's guidelines also state that it is appropriate for a national bank to obtain signed statements from customers acknowledging receipt of these disclosures when investment accounts are opened.
For accounts established before the issuance of the OCC guidelines, a national bank should consider obtaining such a signed statement before the next sale. Most banks already do so. In fact, some get more detailed acknowledgments from consumers than the guidelines require.
The Fed and the Office of Thrift Supervision require, for state member banks and savings associations, respectively, an additional signed customer statement any time an investment product sale is made in a branch. Sales made over the telephone or through automatic investment or "sweep" arrangements should not require a new signed statement before each sale.
NASD Rules Incorporated
Significantly, the Comptroller's guidelines incorporate by reference the Rules of Fair Practice of the National Association of Securities Dealers with respect to investment products recommendations made to customers.
This seems entirely appropriate for a number of reasons. First, few bankers would disagree that retail securities sales activities by national banks should be subject to the same customer protection requirements that apply to their securities industry counterparts.
Second, the NASD rules are well settled standards that have worked effectively to protect consumers. There is no compelling reason to impose different standards on banks.
Banks should ensure that all investment-product salespersons obtain sufficient information from customers to enable them to make a judgment about the suitability of recommendations for a particular customer, as required by the NASD rules.
At a minimum, before making a recommendation to a customer, suitability inquiries should be made and responses documented, consistent with the NASD rules concerning the customer's financial status, tax status, investment objectives and other relevant factors.
Registered broker-dealers, including those affiliated with national banks or otherwise involved with bank-related investment product sales programs, are already subject to the NASD rules.
On the other hand, banks themselves are not directly subject to these rules. National banks may find that they have to adjust their existing procedures to some degree.
The Comtproller's guidelines indicate that compensation programs should not operate as an incentives for salespersons to sell retail investment products over a more suitable option, such as an insured bank deposit.
Tellers who receive compensation for referrals should not be compensated on the basis of the success" of the sale.
Adherence to the NASD suitability standards described above should help achieve compliance with these requirements.
As the Comptroller's Office continues to develop its regulatory regime for national banks that sell investment products, it seems likely that the agency will look to the NASD's experience in interpreting and administering its suitability and other customer protection rules.
Standards for Salespeople
The guidelines impose a series of requirements on national banks to ensure that their rates personnel are properly qualified, adequately trained, and appropriately supervised.
For programs where sales personnel are registered representatives of a broker-dealer or agents of a licensed insurance agency, compliance with the applicable broker-dealer and insurance agency regulations should satisfy the requirements of the OCC guidelines.
However, banks that use unregistered or unlicensed employees to sell investment products may, in some cases, be required to upgrade the skills, training, and supervision of these workers.
Many existing bank investment products programs already use broker-dealer and insurance agent training standards as proxies for the training of bank personnel involved in investment product sales.
The guidelines also require banks to maintain comprehensive compliance programs.
They indicate that the compliance function should be independent of the management of the investment products, sales program. At a minimum, the compliance function should include systems to monitor customer complaints and to review customer accounts to detect and prevent abusive practices.
National banks will likely need to adjust their existing compliance activities to meet the various requirements applicable to the bank's nondeposit investment products program.
To varying degrees, the guidelines undoubtedly will require some changes in existing investment product sales programs of national banks.
Banks also should be aware that it is likely that there will be further guidance in this area. For example, it is expected that more detailed guidelines on investment products sales practices will be provided to OCC examiners shortly.
Moreover, the guidelines are clearly intended to be dynamic standards that will evolve in response to new developments in the marketplace. In addition, several committees of Congress continue to scrutinize bank investment product activities.