On July 19, the Office of the Comptroller of the Currency issued its much-anticipated guidelines for national banks offering mutual funds, annuities, and other nondeposit investment products to retail customers.
These guidelines, set forth in OCC Banking Circular No. 274, were reprinted in substantial part in the July 28 issue of American Banker.
Before the guidelines were released, there was much speculation about them - and some trepidation - within the banking industry.
These same concerns existed within other segments of the financial services industry, most particularly among the securities and insurance-related companies, which support banks in a variety of ways in connection with their retail investment-product activities.
The speculation intensified during the several weeks before the release of the guidelines, as members of the Comptroller's staff floated trial balloons in various contexts as to the content of the guidelines.
At the same time, some quarters of Capitol Hill and the media continued to express serious reservations about the potential negative consequences of banks offering investment products.
|Horror Stories' Rare
This persistent negative focus, while understandable to some extent in Washington political terms, is perplexing.
After all, though many banks have been involved in investment-product activities for over 10 years, there have been few "horror stories."
Furthermore, bank customers are enjoying substantial benefits from more convenient access to much-demanded retail investment products and increased competition among providers.
Indeed, consumers need easy access to the widest range of investment options now more than ever, in view of the current interest rate environment. And it has become abundantly clear that neither employers nor the federal government is in a position to provide adequately for the retirement needs of an aging population.
Against this backdrop, banks and their securities and insurance industry "partners" waited for the Comptroller's guidelines with baited breath, fearing the worst.
A Balanced Response
Fortunately, their worst fears were not realized. There were no "showstoppers" in the guidelines.
The Comptroller's office appears to have carefully balanced the growing demands of consumers to obtain investment products, at their banks, the obvious desire of banks to meet these demands, and the critical need that banks "do it right."
The guidelines are similar, in many respect, to recent policy statements issued for state-chartered member banks by the Federal Reserve Board and for savings associations by the Office of Thrift Supervision.
(The Federal Deposit Insurance Corp. has not yet issued guidelines on investment-product sales for state-chartered nonmember banks.)
The guidelines from the Comptroller's office also generally conform to the requirements it set forth in its April approval of the establishment of Nations Securities, the securities brokerage joint venture between NationsBank and Dean Witter, as well as earlier OCC approvals of specific investment-product activities by national banks.
For example, like many of the earlier approvals, the new guidelines require that specific disclosures be made in connection with the sale of investment products, and that national banks take various measures to avoid possible customer confusion between investment products and insured deposit products.
However, it would be a mistake to view the guidelines as representing nothing more than a codification of earlier pronouncements relating to investment-product activities of national banks.
In fact, the guidelines impose a number of new substantive requirements on national banks involved in the sale of investment products.
Certain of these new requirements apply directly to senior bank management and boards of directors of national banks. The most significant is an obligation to consider and develop comprehensive formal policies addressing the potential risks posed by investment-product sales.
Review Is Urgent
The guidelines also contain certain requirements which vary to some degree from prior positions of the Comptroller's office, as well as some requirements that are not entirely clear.
Accordingly, it is vitally important that national banks that offer or expect to offer investment products to their customers carefully review the guidelines and consult with their counsel to ensure that the bank is in full compliance.
There is a particular urgency to tend to this task, since the guidelines became effective upon issuance.
It already is clear from national banks that are undergoing or have recently undergone Comptroller's examinations relating to their investment-product activities that the agency's examiners intend to apply the new standards vigorously.
The application of the guidelines is very broad. They cover not only direct sales made by bank employees, but also sales on bank premises by employees of affiliated and unaffiliated broker-dealers.
In addition, the guidelines cover telephone and direct-mail sales efforts initiated from bank premises.
Moreover, sales resulting from bank referrals also are covered if the bank receives a benefit.
Given their wide scope, the guidelines are obviously of interest not only to national banks, but also to nonbank entities involved with them in connection with the offering of investment products.
These entities include third-party marketing firms and proprietary mutual fund sponsor distributors.
In fact, the guidelines include a number of requirements which national banks must ensure are embodied in arrangements with such third-party service and product providers
These providers, particularly those providing "turnkey" product and service programs to national banks, would, seem well served to immediately review the structure and operation of their programs to ensure compliance with the new guidelines.
There is little doubt that their bank clientele will be expecting such compliance, although the guidelines make clear that national banks cannot totally rely on the efforts of the third-party service providers.
The guidelines provide that national bank's boards of directors are responsible for evaluating the potential risks posed by bank investment-product sales activities.
In this connection, directors must adopt self-regulatory policies and procedures to ensure compliance with all applicable laws, rules, regulations, and regulatory conditions (such as applicable banking, securities, and insurance law requirements), including relevant provisions of the guidelines
The directors of each national bank, in conjunction with senior management, must ensure that they are appropriately monitoring the bank's investment-product sales program.
Active Oversight Mandated
It is clear that the Comptroller's office is looking for directors to take an active oversight role in connection with investment-product activities.
The difficult question is what this means in a particular circumstance.
On the one hand, a board clearly must satisfy the guidelines' requirements.
On the other hand, it may not be appropriate from a corporate-law perspective for the board to "micromanage" the investment-product sales program.
The ultimate answer to this question will depend in part on the specifics as to the national bank involved and its investment-product program.
Given the importance of this issue, it would not be surprising if the Comptroller's office provided some further guidance on the issue in the near future.
At a minimum, a board should carefully review and approve the bank's investment-product activities, which must be detailed in the newly required program statement discussed below.
The guidelines require national banks to adopt a comprehensive investment-product sales program statement describing the features of the sales program; the roles of the bank, its affiliates, and their respective employees; and the roles of any third-party entities.
This statement should address at least the following matters:
* Supervision of personnel involved in investment-product sales programs.
* The roles of other entities selling on bank premises, including bank supervision and monitoring of compliance by selling employees.
* The types of products the bank will sell, including identification of specific laws, regulations, and other requirements governing the selection and marketing of such products.
* Policies governing the permissible uses of bank customer information.
In sum, a national bank is required to maintain a comprehensive program manifesto that addresses all aspects of its investment-product sales program.
The guidelines require senior management and the boards of national banks engaged in investment-product sales activities to review all current bank policies regarding sales of investment products (or prepare new policies and procedures if none exist) to ensure full compliance.
Coming Next: Mr. Kurucza discusses specific points that banks must address in their investment-product program statements.
Mr. Kurucza is a partner in the law firm of Morrison & Foerster, Washington. His colleagues Robert G. Ballen and Joseph P. Savage helped prepare this article.