This section sets forth guidance for exam- iners reviewing bank nondeposit investment product retail sales operations, including bank-related marketing and promotional activities. Examiners will review a bank's programs for consistency with the Inter- agency Statement on Retail Sales of Nondeposit Investment Products, dated February 15, 1994 (Interagency Statement). The evaluation will cover all bank-related activities including:  Sales or recommendations made by bank employees;  Sales or recommendations made by employees of affiliated or unaffiliated entities occurring on bank premises (including sales or recommendations initiated by telephone or by mail from bank premises); and  Sales resulting from referrals of retail customers to a third party when the bank receives a benefit for the refer- ral. When reviewing a bank's nondeposit in- vestment sales operation, examiners should determine that the bank views customers' interests as critical to all aspects of its sales programs. Examiners should evaluate a bank's policies and procedures from the customers' perspective and should ascer- tain that customers are provided with a high level of protection. If it becomes necessary to recommend remedial action, examiners should determine that bank management responds immediately to any matter that has the potential to confuse customers as to the uninsured nature of nondeposit investment products. Banks that do not operate programs safely and soundly or that engage in violations of law or regulations will be subject to appro- priate regulatory action. When determining the appropriate action, examiners should be mindful that some banks, especially banks relying on third parties for sales of nondeposit investment products, may need time to conform their programs to the Interagency Statement and to the guidance contained herein. At a minimum, however, examiners should determine whether bank management is making a good faith effort to comply with this regulatory guidance in a timely manner. This section applies to sales to individual customers but does not apply to the whole- sale sale of nondeposit investment products to non-retail customers, such as sales to institutional customers or to fiduciary accounts administered by an institution. As part of its general responsibilities, however, a national bank should take appropriate steps to avoid potential customer confusion when providing nondeposit investment products to institutional customers or to the bank's fiduciary customers. For addi- tional information on restrictions on a national bank's use as fiduciary of the bank's brokerage service or other entity with which the bank has a conflict of interest, including purchases of the bank's proprietary and other products, see 12 CFR 9.12 and "Sales to Fiduciary Accounts," later in this section. Scope Examiner reviews of a bank's mutual fund or other nondeposit investment sales pro- gram will concentrate on the policies and procedures the bank adopts and on the effectiveness of their implementation. When reviewing implementation of a bank's program, examiners will investigate whether senior bank management has: (1) Participated in planning the bank's investment sales program; (2) Adopted a framework to ensure compliance with all applicable laws, rules, regulations, regulatory condi- tions, and the Interagency State- ment; and (3) Ensured effective supervision of indi- viduals engaged in sales activities, including employees of the bank and any other entity involved in bank-related sales of investment products. Where relevant, references in this handbook section to bank management or bank employees includes third party managers or third party employees. Minimum Standards for Nondeposit Investment Programs Antifraud provisions of the federal securi- ties laws prohibit materially misleading or inaccurate representation in connection with offers and sales of securities. (See, for example, Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5.) If customers are misled about the nature of nondeposit investment products, including their uninsured status, sellers could face potential liability under these antifraud provisions. Safe and sound banking also requires that bank-related retail sales activi- ties be operated to avoid confusing cus- tomers about the products being offered. Use of nonbank employees to sell these products does not relieve bank manage- ment of the responsibility to take reason- able steps to ensure that the investment sales activities meet these requirements. The Rules of Fair Practice of the National Association of Securities Dealers (NASD) expressly govern sales of securities by broker/dealers who are members of NASD. These rules apply to bank-related securities sales by banking subsidiaries registered as broker/dealers, affiliated broker/dealers, and unaffiliated broker/dealers operating under agreements with banks. These rules apply whether such sales are made on bank premises or at a separate location. These rules do not expressly apply to sales or recommendations made directly by the bank. Even when these rules do not ex- pressly apply, however, they are an appro- priate reference for a bank compliance program designed to ensure that the bank's retail sales of all nondeposit investment products are operated in a safe and sound manner. Before beginning to operate a nondeposit investment sales program, banks may also consider notifying their blanket bond carri- ers of plans to engage in these activities. If applicable, this could permit the bank to obtain written assurances from the carrier that the bank's insurance coverage for employees includes staff representing third party vendors. Examiners also should encourage bank management to review Retail Investment Sales: Guidelines for Banks. The publica- tion, prepared jointly by six banking indus- try trade associations, contains voluntary guidelines for bank sales of nondeposit investment products as well as common sense suggestions for putting many of the OCC's recommendations into action. Program Management Banks must comply with all applicable laws, rules, regulations, and regulatory conditions, and operate consistently with the Interagency Statement for any of their bank-related retail sales of mutual funds, annuities, or other retail nondeposit invest- ment products. Bank directors are respon- sible for evaluating the risks imposed by bank-related sales and are expected to adopt a program statement and self-regula- tory policies and procedures to ensure compliance with all requirements. A bank's policies and procedures must address bank-related retail sales made directly by a bank, through an operating subsidiary or affiliate, or by an unaffiliated entity. Examiners should expect that banks will tailor their policies and procedures to the scope of the bank's sales activities. The level of detail contained in a bank's policies and procedures will depend on the structure and complexity of the bank's program. Examiners will review the bank's securities sales activities to determine that the bank has adopted a statement that addresses the risks associated with the sales program and describes the features of the sales program, the roles of bank employees, and the roles of third party entities. The statement should set forth the strategies the bank will employ to achieve its objectives. It also should outline the self-regulatory proce- dures bank management will implement to ensure that the program's objectives are met without compromising the customers' best interests. At a minimum, examiners should expect bank policies and procedures to address: Supervision of personnel involved in nondeposit investment sales programs Ä Senior bank managers will be expected to ensure that specific individuals employed by the bank, an affiliated broker/dealer, or a third party vendor are responsible for each activity outlined in the bank's policies and procedures. Managers of the bank's securities sales activities will be account- able for understanding the investment products offered and the sales process, as well as for assuring compliance with secu- rities and banking laws, rules, and regula- tions. Designation of employees authorized to sell investment products Ä This should serve as a guide for all bank-related employees dealing with retail nondeposit investment product customers. The program state- ment should specify that only properly trained and supervised employees are permitted to make investment sales or recommendations. It should describe the responsibilities of personnel authorized to sell or recommend nondeposit investment products and of other personnel who may have contact with retail customers con- cerning the sales program. It also should include a description of appropriate and inappropriate referral activities and the training requirements and compensation ar- rangements for each category of personnel. The roles of other entities selling on bank premises, including supervision of selling employees Ä Bank management must plan to monitor compliance by other entities on an ongoing basis. The degree of bank management's involvement should be dictated by the nature and extent of nondeposit investment product sales, the effectiveness of customer protection sys- tems, and customer responses. (See "Third Party Vendors," later in this section for more details on programs operated by third parties.) The types of products sold Ä Policies and procedures should include the criteria the bank will use to select and review each type of product sold or recommended. For each type of product sold by bank employees, the bank should identify specif- ic laws, regulations, regulatory conditions, and any other limitation or requirements, including qualitative considerations, that will expressly govern the selection and marketing of products the bank will offer. (See "Product Selection," later in this section for further discussion of these issues.) Examiners should review:  The process the bank uses to select the products it will offer,  What the bank did to ensure the products meet its customers' needs and expectations, and  How well the bank is performing an ongoing analysis of the appropriate- ness of the products offered for sale. Examiners will also assess the indepen- dence and thoroughness of the analysis and the degree to which the bank relies on ratings services. Examiners should be critical of bank managers who simply choose products that generate the largest sales fees or accept what a third party has to offer without performing an independent analysis of the suitability of the products to the bank's strategy and customer mix. Examiners should not give the impression that the agency expects bank managers to be "stock pickers" or that it intends to expand or limit the types of products banks offer. Instead, examiners should determine that bankers are selecting products that generally meet their customers' needs. (See "Third Party Vendors," later in this section, for more details on the bank's oversight roles when it relies on its third party vendor to select products.) Policies governing the permissible uses of bank customer information Ä Examiners should determine that bank customer infor- mation policies address the permissible uses of such information for any purpose associated with bank-related retail invest- ment sales activity. In particular, if the bank intends to use customer lists to tele- phone depositors whose certificates of deposit are due to mature to inform them about alternative investment products, the policies should outline steps the bank will take to avoid confusing customers as to the risks associated with nondeposit investment products, including their uninsured nature. Banks may also supply customer informa- tion lists to a third party vendor. Supplying such information should only occur, how- ever, after bank management has evaluated steps the third party is taking to avoid confusing customers and after determining such steps are consistent with bank policy. Bank management also may wish to con- sider obtaining a legal opinion concerning the bank's authority to share customer information with third parties. Communications with customers Ä Exam- iners should determine whether the bank's policies consider the need for periodic and ongoing communications with customers to help them understand their investments and to remind customers periodically that the products they have purchased are not insured deposits. Policies should outline customer communications for the bank during periods of market stress and assign responsibilities for such communications. Setting and Circumstances of Nondeposit Investment Product Sales Banks should market nondeposit products in a manner that does not mislead or con- fuse customers as to the nature of the products or their risks. The setting and circumstances surrounding sales of invest- ment products is fundamental to ensuring that customers can readily distinguish between nondeposit investment products and insured deposits. Examiners will deter- mine that bank management has estab- lished controls to distinguish retail deposit-taking activities from the promotion, sale, and subsequent customer relationships related to retail nondeposit investment sales. To minimize customer confusion, sales of, or recommendations for, nondeposit invest- ment products on the bank's premises should be conducted in a physical location distinct from the area where retail deposits are taken. Signs or other means should be used to distinguish the investment sales area from the retail deposit-taking area of the institution. In the limited situation in which physical considerations prevent nondeposit invest- ment product operations from being con- ducted in a distinct area of the bank, a bank has a heightened responsibility to ensure that measures are in place to mini- mize customer confusion. To minimize customer confusion, the bank should make an officer responsible for each of the loca- tions at which the investment product sales will take place. The bank also should employ signs and, where possible, separate desks and person- nel for deposit-taking and investment prod- uct sales. Investment product salespeople should clearly identify themselves by the use of appropriate methods such as name tags or separate business cards. In banks where the investment program is likely to be less elaborate, the examiner should determine, at a minimum, that the bank utilizes the written and oral disclosures described below. In no case should any employee, while located in the routine deposit-taking area, such as the teller window, make general or specific investment recommendations regarding nondeposit investment products, or accept orders for such products, even if unsolicited. Tellers and other employees who are not authorized to sell nondeposit investment products may only refer cus- tomers to individuals who are specifically designated and trained to assist customers interested in the purchase of such prod- ucts. Product names Ä Banks may not offer nondeposit investment products with a product name identical to the bank's name. Names that imply that mutual funds are U.S. government guaranteed also are pro- hibited. Banks also should recognize that the poten- tial for customer confusion may be in- creased if the bank offers nondeposit prod- uct names that are similar to the bank's name. If the bank offers such nondeposit products with names similar to the bank's, it should design sales training programs to minimize the risk of confusing customers. In addition, Securities and Exchange Com- mission (SEC) staff have issued an opinion that common names between a bank and a mutual fund sold or marketed by or through that bank are presumed to be misleading and a violation of the Investment Company Act of 1940. SEC staff contends, howev- er, that a common name fund can rebut the presumption that a fund's name is mislead- ing by ensuring that the cover page of the prospectus prominently discloses that the fund's shares are not deposits or obliga- tions of the bank and are not federally insured. When examining investment sales programs in a bank that is selling funds with names similar to the bank's, examiners will evalu- ate the steps that bank management has taken to avoid confusing customers. The greater the similarity between bank and fund names, the more closely examiners will scrutinize all aspects of a bank's sales program. Examiners should criticize sales programs in which fund names are so similar to the bank's that even mitigating circumstances are unlikely to eliminate customer confu- sion. For example, it may be acceptable for "First National Bank" to offer a nondeposit investment product named "First Fund" as long as the bank has implemented sufficient disclosures, training, and other measures to mitigate customer confusion. Other names, however, such as "First Bank Fund" or "First National Fund" are so similar to a bank's name that they are inappropriate because they are inherently confusing. Examiners and bank management should also be aware that the potential for cus- tomer confusion can depend on the context in which the sales are taking place. For example, it may be inappropriate for the First National Bank to offer a mutual fund product named "FNB Money Market Fund" if First National Bank were also offering an insured deposit product named "FNB Mon- ey Market Account." Overall setting and circumstances Ä When reviewing nondeposit investment product sales operations, examiners should not place undue weight on a single aspect of the setting and circumstances of the sale. Each bank's sales program is different, and one set of rules may not cover all circum- stances or provide all customers with the necessary level of protection. Before judg- ing a particular bank's operations, examin- ers should consider how the various ele- ments of the program interact and whether the elements combined mislead or avoid misleading customers. The following example illustrates how the combination of certain elements can poten- tially mislead customers: An employee of the First National Bank sits at a desk in the lobby. This em- ployee sells money market mutual funds and renews CDs. The employee tells customers about two products the bank is offering: the FNB Money Market Fund, an uninsured retail nondeposit investment product, and the FNB Money Market Account, an insured deposit. This employee may have an incentive to market the uninsured product because the employee gets a commission for selling a mutual fund but receives noth- ing for selling or renewing a deposit. This situation could confuse customers. To mitigate customer confusion, the bank should ensure that the employee has exten- sive knowledge of the products being sold and that the employee is thoroughly aware of customer protection issues. When selling noninsured products, the employee should also require customers to sign a new account form acknowledging that the product is not insured. If space and personnel limitations appear to increase the potential for customer confu- sion, examiners should encourage bank management to require additional training and disclosures, to develop signs and product names that clearly distinguish among the products being sold, and to assure that compensation for selling unin- sured and insured products is equalized. Examiners should expect banks with non- deposit investment sales programs already in operation when this section is issued to initiate actions immediately to conform all aspects of the setting and circumstances of the bank's program to these requirements. In particular, banks should take immediate steps to correct any elements that could confuse customers. Disclosures and Advertising Disclosures Complete and accurate disclosure must be provided to avoid customer confusion as to whether a bank-related product is an in- vestment product or an insured bank de- posit. Examiners should determine that banks selling, advertising, or otherwise marketing nondeposit investment products to retail customers provide the following product disclosures conspicuously: The products offered (1) are not FDIC insured, (2) are not deposits or other obligations of the bank or guaranteed by the bank, and (3) involve investment risks, including possible loss of principal amount invested. The minimum disclosures should be provid- ed to the customer:  Orally during any sales presentation.  Orally when investment advice con- cerning nondeposit investment prod- ucts is provided.  Orally and in writing prior to or at the time an investment account is opened to purchase these products.  In advertisements and other promo- tional materials, as described below. Examiners will determine whether these disclosures are featured conspicuously in all written or oral sales presentations, advertising and promotional materials, prospectuses, confirmations, and periodic statements that include the name or the logo of the bank or an affiliate. Advertisements and brochures also should feature these disclosures at least as large as the text describing the bank's nondepos- it investment products. The OCC believes that these disclosures are conspicuous when they appear on the cover of a bro- chure or on the first part of relevant written text. A bank's disclosures could also be considered conspicuous if it prints the required disclosures in a box or by display- ing them in bold type or with bullet points. The bank should obtain a signed statement acknowledging such disclosures from customers at the time a retail nondeposit investment account is opened. For ac- counts established before issuance of this section, the bank should consider obtaining such a signed statement prior to the next sale. If the bank solicits customers by telephone or mail, it should be assured that customers agreeing to purchase nondeposit investment products receive the disclosure acknowledgement form when they open a new account. A bank should also request all customers who previously opened in- vestment accounts by mail without receiv- ing these written disclosures to sign and return a disclosure acknowledgement to the bank. Confirmations and account statements for nondeposit investment products should contain at least the minimum disclosures if the confirmation or account statement contains the name or logo of the bank or its affiliate. If a customer's periodic deposit account statement includes account infor- mation about nondeposit investment prod- ucts, the bank should clearly separate that information from information about the deposit account. The material on the cus- tomer's periodic deposit account relating to nondeposit investment products also should begin with the disclosures described above as well as the identity of the entity conducting the nondeposit transaction. Where applicable, examiners should deter- mine that the bank has made additional disclosures described in the Interagency Statement regarding affiliate relationships and specific fees and penalties. Some disclosure obligations may arise from the roles a bank or a bank affiliate may play in the distribution, administration, and/or management processes. For example, a bank should disclose remuneration received for performing investment advisory services and administrative services such as shareholder accounting. This disclosure obligation may be met through fee disclosures in a prospectus. If the prospectus does not include such fee dis- closures, the bank must make the disclo- sures by some other means. State law requirements may also govern fee disclo- sures. Additional disclosure responsibilities may occur because of the manner in which nondeposit investment products are mar- keted. Examiners should determine wheth- er public statements about the selection of the products a bank offers are reasonable. As an example, if management represents to customers that it has performed an independent analysis of the product select- ed, the examiner should determine that the bank has actually done so. Examiners will also evaluate management's disclosure to prospective customers of ratings applicable to a particular product, including the source of the rating. If ratings are used to pro- mote certain products, examiners should expect bank management to review wheth- er the bank will disclose ratings changes and, if so, determine how such disclosures will occur. Examiners should also determine whether a bank-related sales program includes any written or oral representations to customers concerning insurance coverage provided by any other entity apart from FDIC, e.g., the Securities Investor Protection Corporation (SIPC), a state insurance fund, or an insurance company. If these types of representations are made, examiners should determine whether training concerning differences in insurance coverage is provided to appropriate personnel. Appro- priate personnel includes anyone who is likely to respond to customer inquiries or individuals designated to sell such prod- ucts. Examiners should also determine if written or oral explanations of the differ- ences in coverage are provided to all cus- tomers. Advertising Examiners should assess the procedures the bank uses to ensure that bank-related sales advertisements are accurate, do not mislead customers about the nature of the product, and include required disclosures. For example, claims about "no fees" or "no charges" are not accurate if the selling bank collects fees for investment advisory services or collects fees for shareholder accounting on the product or service being advertised. In this case a bank could claim that there are no "sales" charges and in- form readers that a description of other charges is contained in the prospectus. Examiners should determine that the bank does not imply in advertising or in written and oral presentations that the bank stands behind an investment product. The bank's marketing department should not be solely responsible for bank-related investment sales advertisements. The issuer, or, if a mutual fund, the distributer, may prepare advertisements of specific investment products that conform to stand- ards developed by self-regulatory organi- zations such as NASD. Senior bank man- agement should appoint an officer respon- sible for ensuring that bank investment advertisements as well as advertisements prepared by another party that make refer- ence to the bank, or any advertisement used in bank-related sales, are accurate, not misleading, and include all required disclosures. Suitability Consistent with the Rules of Fair Practice, the OCC expects banks to determine whether a product being recommended is an appropriate investment for the customer. Banks should ensure that any salespeople involved in bank-related sales obtain sufficient information from customers to enable the salesperson to make a judgment about the suitability of recommendations for particular customers. At a minimum, suitability inquiries should be made consist- ent with the Rules of Fair Practice con- cerning the customer's financial and tax status, investment objectives, and other factors that may be relevant, prior to mak- ing recommendations to the customer. This information should be documented and updated periodically. A well-documented suitability inquiry can protect a bank from dissatisfied customers who threaten litigation. Such litigation could introduce risk to the bank's capital. Accordingly, the OCC may view banks operating a retail securities business with- out appropriate suitability procedures to be engaging in an unsafe and unsound prac- tice. Many banks use software programs that document investor profiles to assist in making suitability judgments. Each profile is based on a customer's responses to inquiries as to his or her financial and rele- vant personal history. The software pro- gram subsequently matches the customer's investment needs and objectives to the bank's available products. This type of software is a tool, not a substitute for professional judgement; it should not weight bank proprietary products too heavi- ly or bank deposits too lightly. One example of a critical suitability deter- mination involves sales to elderly bank customers. Many of these customers rely upon investments or savings for retirement income and may consequently demand high yields. They may not, however, have the ability to absorb or recover losses. A nondeposit investment salesperson should also be aware that it is especially important to make a careful suitability recommenda- tion when dealing with a surviving spouse who is not experienced in investment matters. Examiners should investigate potential suitability problems in mutual fund sales when reviewing "breakpoints" and "letters of intent." Breakpoints are discounts that are available to investors who purchase a large amount of mutual fund shares in a lump sum or as part of a cumulative invest- ment program (e.g. under a "letter of in- tent"). The potential for abuse usually occurs when the sale of several different mutual fund shares takes place in quantities just below the level at which the purchaser would qualify for reduced sales charges on any one of the funds. Examiners should determine whether a bank officer has been assigned responsibili- ty for implementing and/or monitoring the suitability system. The examination ap- proach should focus on the system the bank has in place to make suitability inquir- ies, suitability judgements, and periodic account reviews. Examiners generally should review sales patterns rather than individual sales for suitability issues. To determine the types of sales to test for suitability, examiners should investigate marketing programs that target a class of customers, customer complaints, sales to first-time and risk-averse investors, sales made by high- or low-volume salespersons, volatile and new products, and the exist- ence of mutual fund redemptions after relatively short holding periods. Qualifications and Training Banks should implement detailed training programs to ensure that sales personnel have thorough product knowledge (as opposed to simple sales training for a product) and understand customer protec- tion requirements. Examiners should as- sess the process the bank uses to ensure that sales personnel are properly qualified and adequately trained to sell all bank-related nondeposit investment products. If bank personnel sell or recommend securi- ties, the training should be substantively equivalent to that required for personnel qualified to sell securities as registered representatives. Securities industry training is available in most metropolitan areas. Examiners also should determine that the bank's audit and compliance personnel and persons with supervisory responsibilities are properly trained and knowledgeable. A bank's hiring practices and training plan should be designed around the complexity and risks of the particular investment prod- ucts being offered. While it may be appro- priate to have a banking generalist with no securities industry background sell money market mutual funds, it could be inappro- priate to allow this individual to sell fixed-rate annuities without extensive training. If individuals with securities industry expe- rience are hired to sell investment products for banks, they should have an understand- ing of securities industry customer protec- tion and control systems and have an adequate knowledge of the products being offered. Since they may not be familiar with general banking regulations and may not understand the needs of bank custom- ers, banks should also ensure that these individuals are instructed as to the special- ized obligations of selling investment prod- ucts in a retail banking environment. Ex- aminers should expect management to check with securities regulators to deter- mine if potential bank sales employees with previous securities industry experience have a disciplinary history. Banks engaging in lower volume mutual fund and annuity sales frequently train existing bank employees to sell investment products. Examiners should determine that bank management is satisfied that these individuals have acquired "product knowl- edge," and thoroughly understand the need to safeguard the customers' interests. More specialized "product knowledge" training is generally provided by the mar- keting division of a mutual fund sponsor or another third party vendor. Bank staff should also receive customer protection and compliance training. Examiners should determine whether a bank officer has been assigned responsibil- ity for ensuring that adequate training is provided to bank staff, and for reviewing the hiring and training practices of a third party vendor. Compensation Incentive compensation systems, which are standard in the securities and insurance businesses, are becoming increasingly common in commercial banking. Personnel who are authorized to sell nondeposit investment products may receive incentive compensation, such as commissions, for transactions entered into by customers. However, incentive compensation programs must not be structured in such a way as to result in unsuitable recommendations or sales being made to customers. An improperly designed compensation system can provide a bank employee with the incentive to place his or her own com- pensation interests above the interests of bank customers. Examiners should assess the steps management has taken to ensure that compensation programs do not operate as an incentive for salespeople to make un- suitable recommendations or sales to cus- tomers. One way to avoid having the compensation system drive the recommendation toward mutual funds and away from certificate of deposit renewals would be to separate the nondeposit investment product sales and CD renewal functions. Alternatively, if employees are permitted to offer both deposits and nondeposit investment prod- ucts, a bank could reduce the temptation by compensating the employee for renew- ing maturing deposits as well as for selling nondeposit investment products. Examin- ers should discuss with bank management where appropriate the methods used to avoid possible conflicts of interest poten- tially arising from the bank's compensation plan. To investigate whether incentive compen- sation schemes could induce salespersons to recommend products with higher com- missions over a more suitable option, ex- aminers should look to customer complaints and to sales patterns rather than to individual sales. For example, an examiner can look for instances in which sales for a particular product increased after changes to an incentive compensation system. Examiners also should expect a bank to increase its supervision of sales programs as it increases its incentive compensation. Examiners should be critical of supervision that does not take into account the possi- bility that recommendations for purchases of nondeposit investment products could be influenced by the incentive compensation scheme. If the overall setting and circumstances of a bank's investment sales program appears to be only marginally satisfactory, examin- ers should regard higher incentive compen- sation on certain investment products and lower compensation on deposits and other investment products as having the potential for causing serious problems. In this case the compensation system itself should justify an increase in the level of bank management supervision. If supervision is not adequate, the examiner should criticize the compensation system and other objec- tionable factors in the setting and circum- stance of the sale. Bank supervisory employees who review and approve individual sales, accept new accounts, and review established customer accounts should not receive incentive compensation based on the profitability of individual trades or accounts that are sub- ject to their review. Similarly, department auditors or compliance personnel should not participate in incentive compensation programs that are based directly on the success of sales efforts nor should they report to a manager who receives this type of incentive compensation. In addition, bank management should not rely on third party audit and control systems if that vendor's control personnel receive transac- tion-based incentive compensation. Bank employees, including tellers, may receive a one-time nominal fee of a fixed dollar amount for each customer referred for nondeposit investment products. The payment of this referral fee should not depend on whether the referral results in a transaction. Fiduciary Accounts Pursuant to 12 CFR 9.11(d), examiners will review the investments held by national banks as fiduciary to determine whether such investments are in accordance with law, 12 CFR 9, and sound fiduciary princi- ples. In so doing, they will ensure that the bank has complied with all applicable state and federal restrictions on investment transactions involving the bank's fiduciary accounts. Under 12 CFR 9.12, national bank fiduci- aries may not invest funds held as fiduciary in the stock of organizations with which there exists such a connection as may affect the exercise of the best judgment of the bank in acquiring the stock, unless there exists specific authority for such an investment in the governing instrument, local law, a court order or through consents from all beneficiaries. As to accounts subject to the Employee Retirement Income Security Act of 1974, such investments must be within the authority of that Act. These principles govern purchases of a bank's proprietary products, such as bank-advised mutual funds and private label mutual funds for fiduciary accounts. In addition, pursuant to 12 CFR 9.11(d), examiners will determine that fiduciary purchases and retention of bank proprietary products for fiduciary accounts are in accord with sound fiduciary principles. This requires that even if specific authority exists for fiduciary accounts to purchase or retain bank-advised or bank private label mutual funds, the assets must be appropri- ate for each account. The investment must be consistent with the purpose for which each account was created, and suitable for the beneficial interest holders of each account. This requirement exists as to purchases for individual accounts, and for conversions of collective investment funds to bank-advised mutual funds. Twelve CFR 9.7 requires banks to conduct initial and annual reviews of each fiduciary account as well as a separate review of all securities by issuer to ensure compliance with these requirements. These reviews include:  A documented review of each ac- count to determine that the assets of that account, including any propri- etary products, meet the investment objectives of the account. In struc- turing the account portfolio, the fiduciary must consider the provi- sions of the document establishing the account. The review must also take into account the needs of the beneficial interest holders. This review should address the issues set forth in the Comptroller's Handbook for Fiduciary Activities, "Portfolio Management."  A documented annual review of all assets by issuer, including propri- etary products. This review should consider the quality of fund man- agement, fee structure, risk diversifi- cation and anticipated rates of re- turn. It should also address the con- siderations set forth in the Comptroller's Handbook for Fiduciary Activities, "Investments." Compliance Program Banks must maintain compliance programs capable of verifying compliance with the guidelines specified in the Interagency Statement and with any other applicable requirements. Banks should perform nondeposit investment compliance pro- grams independently of investment product sales and management. At a minimum, the compliance function should include a sys- tem to monitor customer complaints and to review customer accounts periodically to detect and prevent abusive practices. Examiners reviewing the compliance opera- tions of a bank offering a variety of retail investment products should ensure that the bank has comprehensive self-regulatory policies and that it is conducting an ongo- ing comparison of the bank's investment sales practices with its stated investment policy. In banks with a less elaborate investment sales program, where an inter- nal auditing group may perform all of the bank's compliance functions, the examiner should ensure that these auditors are peri- odically comparing sales practices with policy. Individuals performing the audit or compli- ance of the bank's investment program should be qualified and should have the necessary experience to perform the as- signed tasks. Compliance personnel should also engage in ongoing training to keep abreast of emerging developments in bank- ing and securities laws and regulations. Banks can establish independence of audit or compliance personnel if such personnel determine the scope, frequency, and depth of their own reviews; report their findings directly to the board of directors or an appropriate committee of the board; have their performance evaluated by persons independent of the investment product sales function; and receive compensation that is not connected to the success of investment product sales. Bank compliance programs should be mod- eled after those in the securities business where it is customary for compliance per- sonnel to conduct regular and frequent customer account reviews in order to detect and prevent abuses. The extent and frequency of customer account supervision should be dictated by the aggressiveness of the sales program and the riskiness of products being offered. Examiners should expect the bank to assign individuals independent of the sales force to review periodically customer responses to suitability inquiries and to compare these responses to the type and volume of account activity to determine whether the activity in an account is appropriate. If account activity is unusual relative to the customer's stated objectives and risk tolerance, or if account activity is brisk relative to the size of a customer's invest- ment or past practices, management should make follow-up inquiries to determine if the activity serves the best interests of the customer. If examinations or routine oversight by bank management indicates that suitability problems may exist, bank management is expected to conduct its own review of all affected accounts and to institute correc- tive actions. If it is determined that cus- tomers may have been disadvantaged, corrective actions should be designed on a case-by-case basis and may include full explanations to customers and, where appropriate, offers to rescind trades. Customer complaints are an indication of potential problems that warrant a prompt account review. Examiners should expect the bank to assign a bank officer who is independent of the sales force the respon- sibility for approving the resolution of complaints or reviewing the resolution of complaints by a third party vendor. The examiner should evaluate the system for assuring that all complaints (written and oral) receive management's attention by reviewing the bank's audit of the complaint resolution system. Managers of high-volume investment sales programs also often use automated excep- tion reporting systems to flag potential problems before customers complain. Such systems monitor product sales and the performance of salespersons. If the bank has such systems in place, and if the reports show significant volumes of mutual fund redemptions after short holding peri- ods, examiners should review the steps management has taken to investigate whether the product is being sold properly. If early redemptions are restricted to one salesperson or one branch, management can reasonably conclude that the problem is localized. However, early redemptions occurring throughout the sales network may indicate that something is wrong with the product itself or with the training pro- vided to salespeople. Similarly, if reports indicate that a salesperson is selling one type of product almost exclusively, man- agement may need to review that individual's performance or training. Ultimately, the way for bank management to assure itself that the securities salesper- sons are providing the required disclosures and making suitable recommendations to customers is to "test" the sales program. Effective "tests" can be conducted in several ways. Larger banks sometimes employ "testers" who pose as prospective customers and test the sales presentations for a variety of issues including adherence to customer protection standards. Many other well-managed banks (of all sizes) have instituted follow-up programs to verify that their customers understood their investment transactions. A bank manager, who is independent of the sales force, may telephone customers a few days after an investment account is opened or an unusual transaction has taken place. The manager will determine if the customer understands what he or she has purchased; understands the risks, including the uninsured nature of the product; understands the bank's role in the transaction; and can generally confirm responses to a suitability inquiry previously provided. A bank officer usually can determine if a customer understands an investment by asking the customer to describe its general features. The customer should be able to describe how the product works and its risks rather than simply recite what he or she hopes to gain from the particular in- vestment. Managers usually also determine if the customer is satisfied with the product and service or has any problems or suggestions for improving service. If a bank institutes a telephone follow-up pro- gram, it should maintain a record of con- versations with customers to resolve prob- lems or disputes that may arise at a later date. "Negative consent" letters (e.g., notices informing customers that unless they ob- ject, the bank assumes the customer un- derstands and does not object to the trans- actions) may be a useful element in a compliance program but should not be the sole means of verifying that customers understand nondeposit investment product transactions and the bank's role in the process. Examiners should determine whether a bank officer has been assigned the respon- sibility for assuring that the bank adequate- ly monitors the nondeposit investment accounts of customers. Examiners should also determine whether the officer has developed or is developing a system to monitor the customer account reviews of outside vendors operating bank-related sales programs. Oversight of Third Party Vendors When a bank uses a third party vendor to sell nondeposit investment products, the bank's board of directors must adopt a written policy addressing the scope of the activities of the third party, as well as the procedures the bank intends to use for monitoring the third party's compliance with the Interagency Statement. To select the third party vendor and moni- tor the ongoing acceptability of the vendor, bank management usually reviews the vendor's experience in the business and the vendor's financial statement. Bank management also usually contacts other banks with which the vendor has done business for references. Examiners should also expect that bank management checked with the vendor's regulator before it entered into an agreement with the vendor and that management has continued to review reports furnished to the vendor by its regulator(s). Bank management should enter into a written agreement with a third party vendor that has been approved by the bank's board of directors before the vendor is permitted to offer nondeposit investment products to the bank's customers. The agreement should outline the duties and responsibilities of each party and should include a description of all of the activities the third party is permitted to engage in on the bank's premises. The agreement also should set forth terms for the use of the bank's space, personnel, and equipment as well as compensation arrangements for personnel of the bank and the third party. The agreement also should:  Specify that the third party will com- ply with all applicable laws and regulations and will act consistently with the provisions of this temporary insert, especially the provisions relating to customer disclosures,  Authorize the bank to monitor the third party by periodically reviewing and verifying that the third party and its sales representatives are comply- ing with its agreement with the bank, with all applicable laws and regulations, and with the provisions of this temporary insert,  Specify the type, scope, and fre- quency of reports the third party is to furnish to bank management to permit bank management to fulfill its oversight responsibilities,  Authorize the institution and the OCC to have access to appropriate records of the third party,  Require the third party to agree to in- demnify the bank for any liability that resulted from third party invest- ment product sales program actions,  Set forth the training which the bank expects its employees and third party personnel to possess, and  Provide for written employment con- tracts between the bank and the third party vendor's employees. Examiners will review the agreement to determine that it specifies that the third party vendor will comply with all applicable requirements contained in the Interagency Statement. Examiners also will review the agreement to determine if it includes provi- sions regarding bank oversight and examin- er access to appropriate records. It is expected that compliance with the agree- ment will be periodically monitored by the institution's senior management. Before entering into an agreement with a third party vendor, bank management also should be satisfied that the vendor uses a product selection process similar to the one outlined below. Banks relying on a third party vendor to select products also should understand and agree with the vendor's method of analysis and document its con- currence with that method. Examiners should determine whether management has understood and concurred. Bank manage- ment should periodically investigate the vendor's product selection process to ensure that it continues to be appropriate to the bank's customer mix. Examiners also should determine whether bank man- agement understands and agrees with contingency plans developed by the third party vendor and the product issuer to respond to customer orders during unusual surges in redemptions. To fulfill its oversight responsibilities, it is expected that bank management will re- ceive various reports from the third party vendor and have access to the vendor's appropriate records. The reports received will vary with the scope of the sales pro- gram and should be tailored to the needs of the institution. The reports should always include a list of all customer complaints and their resolution. Other reports that may facilitate bank management's oversight role, could include:  A periodic listing of all new account openings and descriptions of the initial trades;  A list of significant or unusual (for the customer) individual sales during a reporting period;  Sales reports by product, salesper- son, and location during a reporting period; and  Reports of internal compliance re- views of customer accounts originat- ed at the bank and reports furnished to the third party vendor by its regu- lator(s) on at least an annual basis. Bank management must monitor compli- ance by third party vendors on an ongoing basis. Senior bank managers will be ex- pected to ensure that specific individuals employed by the bank and by the third party vendor are responsible for each activ- ity outlined in the bank's investment sales policy. The degree of bank management's involvement should be dictated by the types of products being offered, the volume of sales, the nature of customers' complaints, and the effectiveness of the third party vendor's customer protection systems. Senior bank management also should ap- point an officer responsible for ensuring that bank investment advertisements as well as advertisements prepared by another party that refer to the bank, or any adver- tisement used in bank-related sales, are accurate, not misleading, and include all required disclosures. In addition, any ad- vertising or promotional material Ä prepared by or on behalf of a third party vendor Ä should clearly identify the company selling the nondeposit investment product and should not suggest that the depository institution is the seller. Examiner access to the records of third party vendors should be governed by pre- liminary examination findings. When such findings make it clear that bank manage- ment has discharged its oversight responsi- bility by reviewing and responding appropri- ately to third party reports, only a few customer complaints have been filed against the vendor, and the vendor's re- ports are timely, sufficiently detailed, and prepared by someone independent of the vendor's sales force, examiner access to third party records should generally be limited to the reports furnished to manage- ment by the vendor. Product Selection This section describes in general terms the methods that well-managed banks use to select specific nondeposit investment products and to determine that such prod- ucts continue to be acceptable to the bank's customer mix. This information is provided to help examiners understand and review the process used by well-managed banks to make this determination. Bank management should determine the specific laws, regulations, regulatory condi- tions or other limitations or requirements, including qualitative considerations, that will govern the sale of products to be offered. Although not required, most well-run bank investment sales programs limit the number of products offered so that customers and salespersons will not be presented with an overwhelming number of choices. Limitations based on product quality may also make it easier for sales managers to shield certain classes of cus- tomers from inappropriate products. As a general practice, bank investment programs offer at least one type of money market mutual fund for customers who are interested in liquidity. In addition, most banks offer a U.S. government bond fund for customers who stress safety and steady income, an equity fund for customers interested in capital growth, and a tax-exempt bond fund for customers who wish to avoid taxes on investment earnings. When deciding which funds to offer, man- agers should review the fund's performance over an extended period of time. Most bank managers prefer to avoid mutual funds with volatile records. Management's selection of a family of funds should not be based on the performance of one particular fund; each fund selection should stand on its own merits. Management's selection of investment products usually begins with an evaluation of the stability of asset values over time and an assessment of yields to investors. Management also compares the perfor- mance of other funds with similar objec- tives over the same period(s). Specialized ratings services (such as Morningstar or Lipper) or rankings by analytical services are usually regarded as necessary but secondary considerations. Management also considers the fund's track record in terms of both risk and re- ward. Management analyzes the fund's net asset value versus total return, its management or operating expenses, the turnover within the fund's portfolio, and capital gains and other sources of income. Other key considerations include the com- position of the portfolio and concentrations in types of holdings, sector weights, and, in the case of equity funds, the percentage of ownership represented by individual issues. Management also evaluates important non-statistical factors such as the continuity, tenure, and demonstrated talent of the fund's management. They also may con- sider factors such as the quality of a mutu- al fund's operational and marketing sup- port. The bank itself, and not another entity's marketing department, should select the funds to be offered. Independent commit- tees and qualified analysts should make the final selections, not a sales manager whose view of the commission structure may affect this judgment. If the bank uses outside consultants to help select a mutual fund, bank management should determine whether the consultant receives compensation from mutual funds or mutual fund wholesalers. If the analysis is performed by another party, such as a clearing broker or third party vendor, bank management should understand and agree with the method of analysis and should document the bank's concurrence. Regardless of who selects the mutual fund products, bank management will be expect- ed to consider the issuer's contingency plans for handling unusual surges in re- demptions at the time such products are being considered. Such contingency plans normally include emergency staffing, com- munications, and operational programs that are based on various market scenarios. Bank management should compare these contingency plans to the expected needs of bank customers during periods of stress. Finally, once the initial selection process is complete, bank management should con- duct ongoing reviews to assure that the products remain acceptable in light of the bank's objectives and customer's needs. Selection of annuity products is conducted in the same manner. A variable-rate annu- ity, a hybrid form of investment that con- tains elements of mutual funds and insur- ance, could be characterized as a mutual fund operated by an insurance company. During product selection, bank management should consider the performance and composition of the portfolio that is dedicat- ed to the annuity holders. Selection analysis for fixed-rate annuities differs from variable-rate annuities. Since fixed-rate annuities are obligations of insur- ance companies, the risks associated with them relate to the issuer's ability to honor the terms of the annuity contract. Accord- ingly, the safety of an annuity depends upon the financial standing of the firm that issues it and the selection analysis involves an assessment of the quality and diversifi- cation of the company's assets, its hold- ings of junk bonds, mortgage-backed secu- rities, and problem real estate loans, as well as the continuity of management. Because it is difficult to independently analyze insurance companies, ratings pro- vided by rating agencies such as A.M. Best, Standard & Poor's, Duff & Phelps, Moody's and Weiss Research play a part in annuity analysis. If bank management relies significantly on such ratings rather than on its own analysis, however, examiners should expect that the issuer selected by the bank has received top ratings from most of the ratings services. When analyzing annuities, management also should recognize that an issuing insur- ance company can, in certain circum- stances, sell or simply transfer the annuity contract to another insurance company, thereby extinguishing its obligation to the purchaser of the annuity. Annuity owners are generally, but not always, asked to consent to this transfer. A bank selling annuities should consider the possibility of such a transfer in its product selection analysis. At a minimum, the bank should disclose this possibility to prospective customers. Interagency Statement on Retail Sales on Nondeposit Investment Products The full text of the interagency statement begins on the next page. Interagency Statement on Retail Sales on Nondeposit Investment Products February 15, 1994 Introduction Recently many insured depository institu- tions have expanded their activities in recommending or selling to retail customers nondeposit investment products, such as mutual funds and annuities. Many deposi- tory institutions are providing these serv- ices at the retail level, directly or through various types of arrangements with third parties. Sales activities for nondeposit investment products should ensure that customers for these products are clearly and fully in- formed of the nature and risks associated with these products. In particular, where nondeposit investment products are recom- mended or sold to retail customers, deposi- tory institutions should ensure that custom- ers are fully informed that the products:  Are not insured by the FDIC;  Are not deposits or other obligations of the institution and are not guaranteed by the institution; and,  Are subject to investment risks, includ- ing possible loss of principal invested. Moreover, sales activities involving these investment products should be designed to minimize the possibility of customer confu- sion and to safeguard the institution from liability under the applicable anti-fraud provisions of the federal securities laws, which, among other things, prohibit materi- ally misleading or inaccurate representa- tions in connection with the sale of securi- ties. The four federal banking agencies Ä the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision Ä are issuing this Statement to provide uniform guidance to depository institutions engaging in these activities. (Note: Each of the four banking agencies has in the past issued guidelines addressing various aspects of the retail sale of nondeposit investment products. OCC Banking Circular 274 (July 19, 1993); FDIC Supervisory Statement FIL-71-93 (October 8, 1993); Federal Reserve Letters SR 93-35 (June 17, 1993), and SR 91-14 (June 6, 1991); OTS Thrift Bulletin 23-1 (September 7, 1993). This Statement is intended to consolidate and make uniform the guidance contained in the various existing state- ments of each of the agencies, all of which are superseded by this Statement. Some of the banking agencies have adopted additional guidelines covering the sale of certain specific types of instruments by depository institutions, i.e., obligations of the institution itself or of an affiliate of the institution. These guidelines remain in effect except where clearly inapplicable.) Scope This Statement applies when retail recom- mendations or sales of nondeposit invest- ment products are made by:  Employees of the depository institution;  Employees of a third party, which may or may not be affiliated with the institu- tion (see Note, below, addressing which institutions are covered), occurring on the premises of the institution (including telephone sales or recommendations by employees or from the institution's premises and sales or recommendations initiated by mail from its premises); and  Sales resulting from a referral of retail customers by the institution to a third party when the depository institution receives a benefit for the referral. (Note: This Statement does not apply to the subsidiaries of insured state nonmem- ber banks, which are subject to separate provisions, contained in 12 CFR 337.4, relating to securities activities. For OTS-regulated institutions that conduct sales of nondeposit investment products through a subsidiary, these guidelines apply to the subsidiary. 12 CFR 545.74 also applies to such sales. Branches and agencies of U.S. foreign banks should follow these guide- lines with respect to their nondeposit in- vestment sales programs.) These guidelines generally do not apply to the sale of nondeposit investment products to non-retail customers, such as sales to fiduciary accounts administered by an institution. (Note: Restrictions on a na- tional bank's use as fiduciary of the bank's brokerage service or other entity with which the bank has a conflict of interest, including purchases of the bank's propri- etary and other products, are set out in 12 CFR 9.12. Similar restrictions on transac- tions between funds held by a federal savings association as fiduciary and any person or organization with whom there exists an interest that might affect the best judgment of the association acting in its fiduciary capacity are set out in 12 CFR 550.10. However, as part of its fiduciary responsibility, an institution should take appropriate steps to avoid potential cus- tomer confusion when providing nondeposit investment products to the institution's fiduciary customers.) Adoption of Policies and Procedures Program Management. A depository insti- tution involved in the activities described above for the sale of nondeposit investment products to its retail customers should adopt a written statement that addresses the risks associated with the sales program and contains a summary of policies and procedures outlining the features of the institution's program and addressing, at a minimum, the concerns described in this Statement. The written statement should address the scope of activities of any third party involved, as well as the procedures for monitoring compliance by third parties in accordance with the guidelines below. The scope and level of detail of the statement should appropriately reflect the level of the institution's involvement in the sale or recommendation of nondeposit investment products. The institution's statement should be adopted and reviewed periodically by its board of directors. Depository institutions are encouraged to consult with legal counsel with regard to the implementation of a nondeposit investment product sales program. The institution's policies and procedures should include the following:  Compliance procedures. The procedures for ensuring compliance with applicable laws and regulations and consistency with the provisions of this Statement.  Supervision of personnel involved in sales. A designation by senior man- agers of specific individuals to exercise supervisory responsibility for each activ- ity outlined in the institution's policies and procedures.  Types of products sold. The criteria governing the selection and review of each type of product sold or recom- mended.  Permissible use of customer information. The procedures for the use of information regarding the institution's customers for any purpose in connec- tion with the retail sale of nondeposit investment products.  Designation of employees to sell invest- ment products. A description of the responsibilities of those personnel au- thorized to sell nondeposit investment products and of other personnel who may have contact with retail customers concerning the sales program, and a description of any appropriate and inappropriate referral activities and the training requirements and compensation arrangements for each class of person- nel. Arrangements with Third Parties. If a depository institution directly or indirectly, including through a subsidiary or service corporation, engages in activities as de- scribed above under which a third party sells or recommends nondeposit investment products, the institution should, prior to entering into the arrangement, conduct an appropriate review of the third party. The institution should have a written agreement with the third party that is approved by the institution's board of directors. Compliance with the agreement should be periodically monitored by the institution's senior management. At a minimum, the written agreement should:  Describe the duties and responsibilities of each party, including a description of permissible activities by the third party on the institution's premises, terms as to the use of the institution's space, personnel, and equipment, and compen- sation arrangements for personnel of the institution and the third party.  Specify that the third party will comply with all applicable laws and regulations, and will act consistently with the provi- sions of this Statement and, in particu- lar, with the provisions relating to cus- tomer disclosures.  Authorize the institution to monitor the third party and periodically review and verify that the third party and its sales representatives are complying with its agreement with the institution.  Authorize the institution and the appro- priate banking agency to have access to such records of the third party as are necessary or appropriate to evaluate such compliance.  Require the third party to indemnify the institution for potential liability resulting from actions of the third party with regard to the investment product sales program.  Provide for written employment con- tracts, satisfactory to the institution, for personnel who are employees of both the institution and the third party. General Guidelines 1. Disclosures and Advertising The banking agencies believe that recom- mending or selling nondeposit investment products to retail customers should occur in a manner that assures that the products are clearly differentiated from insured deposits. Conspicuous and easy to comprehend disclosures concerning the nature of nondeposit investment products and the risk inherent in investing in these products are one of the most important ways of en- suring that the differences between nondeposit products and insured deposits are understood. Content and Form of Disclosure. Disclo- sures with respect to the sale or recom- mendation of these products should, at a minimum, specify that the product is:  Not insured by the FDIC;  Not a deposit or other obligation of, or guaranteed by, the depository institu- tion;  Subject to investment risks, including possible loss of the principal amount invested. The written disclosures described above should be conspicuous and presented in a clear and concise manner. Depository institutions may provide any additional disclosures that further clarify the risks involved with particular nondeposit invest- ment products. Timing of Disclosure. The minimum disclo- sures should be provided to the customer:  Orally during any sales presentation,  Orally when investment advice concern- ing nondeposit investment products is provided,  Orally and in writing prior to or at the time an investment account is opened to purchase these products, and  In advertisements and other promotional materials, as described below. A statement, signed by the customer, should be obtained at the time such an account is opened, acknowledging that the customer has received and understands the disclosures. For investment accounts established prior to the issuance of these guidelines, the institution should consider obtaining such a signed statement at the time of the next transaction. Confirmations and account statements for such products should contain at least the minimum disclosures if the confirmations or account statements contain the name or the logo of the depository institution or an affiliate. (Note: These disclosures should be made in addition to any other confirma- tion disclosures that are required by law or regulation, e.g., 12 CFR 12, 208.8(k)(3), and 344.) If a customer's periodic deposit account statement includes account infor- mation concerning the customer's nondeposit investment products, the infor- mation concerning these products should be clearly separate from the information concerning the deposit account, and should be introduced with the minimum disclo- sures and the identity of the entity con- ducting the nondeposit transaction. Advertisements and Other Promotional Material. Advertisements and other promo- tional and sales material, written or other- wise, about nondeposit investment prod- ucts sold to retail customers should con- spicuously include at least the minimum disclosures discussed above and must not suggest or convey any inaccurate or mis- leading impression about the nature of the product or its lack of FDIC insurance. The minimum disclosures should also be em- phasized in telemarketing contacts. Any third party advertising or promotional ma- terial should clearly identify the company selling the nondeposit investment product and should not suggest that the depository institution is the seller. If brochures, signs, or other written material contain informa- tion about both FDIC-insured deposits and nondeposit investment products, these materials should clearly segregate informa- tion about nondeposit investment products from the information about deposits. Additional Disclosures. Where applicable, the depository institution should disclose the existence of an advisory or other ma- terial relationship between the institution or an affiliate of the institution and an invest- ment company whose shares are sold by the institution and any material relationship between the institution and an affiliate involved in providing nondeposit investment products. In addition, where applicable, the existence of any fees, penalties, or surrender charges should be disclosed. These additional disclosures should be made prior to or at the time an investment account is opened to purchase these prod- ucts. If sales activities include any written or oral representations concerning insurance cov- erage provided by any entity other than the FDIC, e.g., the Securities Investor Protec- tion Corporation (SIPC), a state insurance fund, or a private insurance company, then clear and accurate written or oral explana- tions of the coverage must also be provided to customers when the representations concerning insurance coverage are made, in order to minimize possible confusion with FDIC insurance. Such representations should not suggest or imply that any alter- native insurance coverage is the same as or similar to FDIC insurance. Because of the possibility of customer confusion, a nondeposit investment product must not have a name that is identical to the name of the depository institution. Recommending or selling a nondeposit investment product with a name similar to that of the depository institution should only occur pursuant to a sales program designed to minimize the risk of customer confusion. The institution should take appropriate steps to assure that the issuer of the product has complied with any applicable requirements established by the Securities and Exchange Commission re- garding the use of similar names. 2. Setting and Circumstances Selling or recommending nondeposit invest- ment products on the premises of a deposi- tory institution may give the impression that the products are FDIC-insured or are obligations of the depository institution. To minimize customer confusion with deposit products, sales or recommendations of nondeposit investment products on the premises of a depository institution should be conducted in a physical location distinct from the area where retail deposits are taken. Signs or other means should be used to distinguish the investment sales area from the retail deposit-taking area of the institution. However, in the limited situation where physical considerations prevent sales of nondeposit products from being conducted in a distinct area, the institution has a heightened responsibility to ensure appropriate measures are in place to minimize customer confusion. In no case, however, should tellers and other employees, while located in the routine deposit-taking area, such as the teller window, make general or specific investment recommendations regarding nondeposit investment products, qualify a customer as eligible to purchase such products, or accept orders for such prod- ucts, even if unsolicited. Tellers and other employees who are not authorized to sell nondeposit investment products may refer customers to individuals who are specifi- cally designated and trained to assist cus- tomers interested in the purchase of such products. 3. Qualifications and Training The depository institution should ensure that its personnel who are authorized to sell nondeposit investment products or to provide investment advice with respect to such products are adequately trained with regard to the specific products being sold or recommended. Training should not be limited to sales methods, but should impart a thorough knowledge of the products involved, of applicable legal restrictions, and of customer protection requirements. If depository institution personnel sell or recommend securities, the training should be the substantive equivalent of that re- quired for personnel qualified to sell securi- ties as registered representatives. (Note: Savings associations are not exempt from the definitions of "broker" and "dealer" in Sections 3(a)(4) and 3(a)(5) of the Securi- ties Exchange Act of 1934; therefore, all securities sales personnel in savings associ- ations must be registered representatives.) Depository institution personnel with super- visory responsibilities should receive train- ing appropriate to that position. Training should also be provided to employees of the depository institution who have direct contact with customers to ensure a basic understanding of the institution's sales activities and the policy of limiting the involvement of employees who are not authorized to sell investment products to customer referrals. Training should be updated periodically and should occur on an ongoing basis. Depository institutions should investigate the backgrounds of employees hired for their nondeposit investment products sales programs, including checking for possible disciplinary actions by securities and other regulators if the employees have previous investment industry experience. 4. Suitability and Sales Practices Depository institution personnel involved in selling nondeposit investment products must adhere to fair and reasonable sales practices and be subject to effective man- agement and compliance reviews with regard to such practices. In this regard, if depository institution personnel recommend nondeposit investment products to custom- ers, they should have reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information dis- closed by the customer. Personnel should make reasonable efforts to obtain informa- tion directly from the customer regarding, at a minimum, the customer's financial and tax status, investment objectives, and other information that may be useful or reasonable in making investment recom- mendations to that customer. This infor- mation should be documented and updated periodically. 5. Compensation Depository institution employees, including tellers, may receive a one-time nominal fee of a fixed dollar amount for each customer referral for nondeposit investment products. The payment of this referral fee should not depend on whether the referral results in a transaction. Personnel who are authorized to sell nondeposit investment products may re- ceive incentive compensation, such as commissions, for transactions entered into by customers. However, incentive com- pensation programs must not be structured in such a way as to result in unsuitable recommendations or sales being made to customers. Depository institution compliance and audit personnel should not receive incentive compensation directly related to results of the nondeposit investment sales program. 6. Compliance Depository institutions should develop and implement policies and procedures to en- sure that nondeposit investment product sales activities are conducted in compliance with applicable laws and regulations, the institution's internal policies and proce- dures, and in a manner consistent with this Statement. Compliance procedures should identify any potential conflicts of interest and how such conflicts should be ad- dressed. The compliance procedures should also provide for a system to monitor customer complaints and their resolution. Where applicable, compliance procedures also should call for verification that third party sales are being conducted in a man- ner consistent with the governing agree- ment with the depository institution. The compliance function should be con- ducted independently of nondeposit in- vestment product sales and management activities. Compliance personnel should determine the scope and frequency of their own review, and findings of compliance reviews should be periodically reported directly to the institution's board of direc- tors, or to a designated committee of the board. Appropriate procedures for the nondeposit investment product programs should also be incorporated into the institution's audit program. Supervision by Banking Agencies The federal banking agencies will continue to review a depository institution's policies and procedures governing recommendations and sales of nondeposit investment products, as well as management's imple- mentation and compliance with such poli- cies and all other applicable requirements. The banking agencies will monitor compli- ance with the institution's policies and procedures by third parties that participate in the sale of these products. The failure of a depository institution to establish and observe appropriate policies and procedures consistent with this Statement in connec- tion with sales activities involving nondeposit investment products will be subject to criticism and appropriate correc- tive action. Questions on the Statement may be sub- mitted to: FRB Ä Division of Banking Supervision and Regulation, Securities Regulation Section, (202) 452-2781; Legal Divi- sion, (202) 452-2246. FDIC Ä Office of Policy, Division of Supervision, (202) 898-6759; Regulation and Legislation Sec- tion, Legal Division (202) 898-3796. OCC Ä Office of the Chief National Bank Examiner, Capital Markets Group, (202) 874-5070. OTS Ä Office of Supervision Policy, (202) 906-5740; Corporate and Securities Division, (202) 906-7289. Effective date: February 15, 1994