WASHINGTON -- The Office of the Comptroller of the Currency on Monday became the second federal regulator to issue guidelines for bank sales of uninsured investment products such as mutual funds and annuities.
The guidelines, though not carrying the weight of regulations, call on national banks to disclose "conspicuously" mutual funds are not covered by deposit insurance, that the funds are not guaranteed, and that their principal is at risk.
Like Fed's Instructions
The statement is similar to the instructions that the Federal Reserve Board issued to its regional banks June 17. However, the Office of the Comptroller's guidelines, running to seven pages, go into greater detail yet are more lenient about some aspects of investment product sales.
The agencies have a common goal that banking representatives endorse: to make sure bank customers know what they are buying.
"Banks don't want to jeopardize customer relationships," said Joe Belew, president of the Consumer Bankers Association. "They really want to do this right. The key is making sure people understand what's insured and what's not insured."
The OCC is sending its policy statement to all examiners and the heads of national banks.
The Fed labeled its four pages of guidelines as "interim" and noted that a common policy statement from all the agencies was being developed. It is unclear why the agencies did not wait until they had arrived at a common position. The FDIC has said nothing about its approach to mutual fund sales.
The Fed takes a harder line than the Comptroller's office on which bank employees may sell investment products. Both agencies would bar tellers from giving investment advice, but the Fed said employees who open insured deposit accounts may not sell mutual funds.
The OCC policy permits an overlap but stresses that every bank employee who sells mutual funds must be properly trained and "should disclose this dual role to customers."
The Fed also said it wants mutual funds sales people to work in areas physically separate from those where insured deposits are taken. The OCC, noting that some banks have limited space and few employees, merely encourages banks to "take steps to separate" retail deposit-taking from nondeposit product sales.
Analyze Customer Needs
The Comptroller said employees selling mutual funds should assess whether the investment suits a particular customer. Employees should ask customers about their investment goals and their financial status.
The regulator also said a national bank may not name mutual funds after itself. But similar names are being permitted. For example, NationsBank may call its mutual fund Nations Fund.
If a bank sells mutual funds to customers through a third party, then bank management should make sure the outside company follows the guidelines, OCC said. Examiners may require access to documents kept by these vendors, OCC noted.
The OCC said bank directors must keep on top of the risks posed of selling uninsured investments.
Self-Regulatory Policies
"Bank directors are responsible for evaluating the risks posed by bank-related nondeposit investment sales." the policy reads. "Bank directors must adopt self-regulatory policies and procedures to ensure compliance."
"The OCC is saying very specifically that this is an area that should receive direct attention of bank management and directors," said Robert M. Kurucza, a Washington partner at the Morrison & Foerster law firm.
Susan Krause, senior deputy comptroller for bank supervision, said the policy's elements should be viewed as parts that add up to a whole. For example, if a bank chooses to give a fund a name similar to its own, then disclosures may need to be more deliberate to ensure customers are not confused.
She said she does not believe the guidelines will cause "any significant change" in the way banks do business.
"We are worried here about preventing any kind of competition-driven deterioration in the standards that those banks that have started to offer these products have already imposed on themselves," said William Dehnke, an OCC lawyer who helped write the policy.
"A lot of what they are suggesting here is what banks are already doing," said James D. McLaughlin, head of agency relations at the American Bankers Association.
Ms. Krause said the OCC has uncovered no abuses in the banking industry. The policy was developed in response to the recent big and growing involvement of banks in the mutual fund business.
She admitted that the OCC does not know how many banks sell mutual funds either directly or through a third party, but she said it is clear that banks are increasing their share of the business.
"In the not too distant future, banks could easily account for half the mutual fund sales," said Ed Yingling, the ABA's top lobbyist.
