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F ederal R eserve Bank

D. M c T E E R , J R .



March 9, 1994
No tice 94-27

The Chief Executive Officer of
each member bank, bank holding
company, and others concerned in
the Eleventh Federal Reserve District
Interagency Statement on Retail Sales of
Nondeposit Investment Products

The Board of Governors of the Federal Reserve System, along with the
other federal banking regulators, have issued a press release announcing the
issuance of an interagency statement that provides comprehensive guidance on
retail sales of nondeposit investment products occurring on or from depository
institution premises.
The interagency statement, which is included with the
press release, unifies the pronouncements issued by the banking agencies last
year addressing various aspects of retail sales programs involving mutual
funds, annuities and other nondeposit investment products.
The interagency statement applies to all depository institutions,
including state member banks and the U.S. branches and agencies of foreign
banks, supervised by the Federal Reserve.
It emphasizes the importance of
adopting comprehensive policies and procedures governing sales programs, and
includes directions relating to the following matters:

disclosure and advertising
the use of identical and similarly named products
the separation of sales programs
the training and supervision of personnel
sales practices and suitability
third-party arrangements

The interagency statement is effective immediately and should be
reviewed by your management, supervisory, and other personnel responsible for,
or involved in, retail sales programs for nondeposit investment products.

A copy of the press release and the interagency statement are

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (





For more information or if you have any questions concerning this
matter, please contact Marion White in Dallas at (214) 922-6155 or Richard
Burda in Houston at (713) 652-1503. At the Board of Governors, please contact
Richard Ashton, Associate General Counsel, at (202) 452-3750 or Angela
Desmond, Senior Attorney, at (202) 452-3497.
For additional copies of this B a n k ’s notice, please contact the
Public Affairs Department at (214) 922-5254.
Sincerely yours,

Office of the Comptroller of the Currency
Joint Release ___________ Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Office of Thrift Supervision
For Immediate Release
February 16, 1994
Regulators Issue Uniform Guidance on Mutuai Fund Sales
The federal bank and thrift regulatory agencies today released a joint statement on retail
sales of mutual fund and other nondeposit investment products by federally insured
financial institutions. The statement supersedes guidance previously issued by each of the
four agencies.
Today's action means insured financial institutions will now be operating under the same
interagency statement for the provision of mutual fund and other investment services. The
statement applies to insured depository institutions offering a mutual fund or other
nondeposit investment product sales program at the retail level, either directly or indirectly.
It reaffirms the agencies’ belief that retail customers must be fully informed about risks
associated with mutual fund or other nondeposit investment products. Banks and thrifts
recommending or selling such products should ensure that customers are fully informed that
the products: (1) are not FDIC-insured, (2) are not deposits or other obligations of the
institution and are not guaranteed by the institution, and (3) involve investment risks,
including possible loss of principal. These disclosures should be conspicuous and presented
in a clear and concise manner.
The statement makes clear that tellers should not make specific recommendations about
nondeposit investments, qualify customers, or accept orders. It also outlines steps
depository institutions should take to minimize the possibility o f customer confusion.
Among other things, banks and thrifts should:
advertise and disclose information about mutual fund and other investment products
in a manner that clearly differentiates these products from insured deposits;
obtain a signed statement when a customer opens an investment account
acknowledging that the customer has received and understands the disclosures;
conduct investment sales programs on bank premises in a physical location distinct
from the area where retail deposits are taken;

ensure that investment sales personnel are properly qualified and trained:

- more -

ensure that sales personnel recommend particular investments that are suitable for
the particular customer; and
ensure that incentive compensation programs are properly structured to protect

Banks and thrifts should adopt written policies and procedures to implement their
investment sales programs that are consistent with the joint statement. The agencies will be
examining the institutions they supervise for compliance with the joint statement.
The agencies will mail copies o f the joint statement to the institutions they regulate.

February 15, 1994

Recently many insured depository institutions have expanded their activities in recommending
or selling to retail customers nondeposit investment products, such as mutual funds and
annuities. Many depository institutions are providing these services 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 informed of the nature and risks associated with these products.
In particular, where nondeposit investment products are recommended or sold to retail
customers, depository institutions should ensure that customers are fully informed that the
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, including possible loss of the principal invested.


Moreover, sales activities involving these investment products should be designed to minimize
the possibility of customer confusion and to safeguard the institution from liability under the
applicable anti-fraud provisions of the federal securities laws, which, among other things,
prohibit materially misleading or inaccurate representations in connection with the sale of

The four federal banking agencies — 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 o f Thrift Supervision -- are issuing this Statement to provide uniform guidance to
depository institutions engaging in these activities.1

This Statement applies when retail recommendations or sales of nondeposit investment
products are made by:

employees of the depository institution;

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 (Sept. 7,
1993). This Statement is intended to consolidate and make uniform the guidance contained in
the various existing statements of each of the agencies, all of which are superseded by this
Statem ent
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 o f an affiliate of the institution. These guidelines remain in effect except
where clearly inapplicable.


employees of a third party, which may or may not be affiliated with the
institution,2 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.

These guidelines generally do not apply to the sale of nondeposit investment products to nonretail customers, such as sales to fiduciary accounts administered by an institution.3 However,
as part of its fiduciary responsibility, an institution should take appropriate steps to avoid
potential customer confusion when providing nondeposit investment products to the
institution’s fiduciary customers.

P ro g ram M anagem ent. A depository institution involved in the activities described above

2 This Statement does not apply to the subsidiaries of insured state nonmember 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
guidelines with respect to their nondeposit investment sales programs.
3 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, are set out in 12 CFR 9.12. Similar restrictions on
transactions 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 judgm ent of the
association acting in its fiduciary capacity are set out in 12 CFR 550.10.


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 o f 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


Supervision of personnel involved in sales. A designation by senior
managers of specific individuals to exercise supervisory responsibility for each
activity outlined in the institution’s policies and procedures.


Types of products sold. The criteria governing the selection and review
each type of product sold or recommended.


Permissible use of customer information. The procedures for the use of



information regarding the institution’s customers for any purpose in connection
with the retail sale of nondeposit investment products.

Designation of employees to sell investment products. A description of the
responsibilities of those personnel authorized 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 personnel.

Arrangements with Third Parties. If a depository institution directly or indirectly,
including through a subsidiary or service corporation, engages in activities as described 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 o f 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
compensation 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 provisions of this Statement
and, in particular, with the provisions relating to customer 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 appropriate banking agency to have access to
such records of the third party as are necessary or appropriate to evaluate such


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 contracts, satisfactory to the institution, for
personnel who are employees of both the institution and the third party.

1. Disclosures and Advertising
The banking agencies believe that recommending 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 ensuring that the differences between
nondeposit products and insured deposits are understood.


Content and Form o f Disclosure. Disclosures with respect to the sale or recommendation 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 institution;


subject to investment risks, including possible loss of the principal amount

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 investment products.

Timing of Disclosure. The minimum disclosures should be provided to the customer:

orally during any sales presentation;
orally when investment advice concerning nondeposit investment products is


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.4 If a customer’s periodic deposit account statement
includes account information concerning the customer’s nondeposit investment products, the
information concerning these products should be clearly separate from the information
concerning the deposit account, and should be introduced with the minimum disclosures and
the identity of the entity conducting the nondeposit transaction.

Advertisements and Other Promotional Material. Advertisements and other promotional
and sales material, written or otherwise, about nondeposit investment products sold to retail
customers should conspicuously include at least the minimum disclosures discussed above and
must not suggest or convey any inaccurate or misleading impression about the nature of the
product or its lack of FDIC insurance. The minimum disclosures should also be emphasized
in telemarketing contacts. Any third party advertising or promotional material 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
information about both FDIC-insured deposits and nondeposit investment products, these
materials should clearly segregate information about nondeposit investment products from the

These disclosures should be made in addition to any other confirmation disclosures that
are required by law or regulation. E.g., 12 CFR Parts 12 and 344, and 12 CFR 208.8(k)(3):


information about deposits.

Additional Disclosures.

Where applicable, the depository institution should disclose the

existence of an advisory or other material relationship between the institution or an affiliate of
the institution and an investment 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 products.

If sales activities include any written or oral representations concerning insurance coverage
provided by any entity other than the FDIC, e.g., the Securities Investor Protection
Corporation (SIPC), a state insurance fund, or a private insurance company, then clear and
accurate written or oral explanations 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 alternative 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 regarding the use of similar names.

2. Setting and Circumstances
Selling or recommending nondeposit investment products on the premises of a depository
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 deposittaking 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 products, even if unsolicited. Tellers and other employees
who are not authorized to sell nondeposit investment products may refer customers to
individuals who are specifically designated and trained to assist customers 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 required for personnel qualified to sell securities
as registered representatives.5 Depository institution personnel with supervisory
responsibilities should receive training 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

Savings associations are not exempt from the definitions of "broker" and "dealer" in
Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934; therefore, all securities
sales personnel in savings associations must be registered representatives.



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 management and
compliance reviews with regard to such practices. In this regard, if depository institution
personnel recommend nondeposit investment products to customers, they should have
reasonable grounds for believing that the specific product recommended is suitable for the
particular customer on the basis of information disclosed by the customer. Personnel should
make reasonable efforts to obtain information directly from the customer regarding, at a
minimum, the custom er’s financial and tax status, investment objectives, and other
information that may be useful or reasonable in making investment recommendations to that
customer. This information 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 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.

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 ensure that
nondeposit investment product sales activities are conducted in compliance with applicable
laws and regulations, the institution’s internal policies and procedures, and in a manner
consistent with this Statement. Compliance procedures should identify any potential conflicts
of interest and how such conflicts should be addressed. 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 manner consistent with the governing agreement with the depository

The compliance function should be conducted independently of nondeposit investment
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 directors, or to a designated committee of the
board. Appropriate procedures for the nondeposit investment product program should also be
incorporated into the institution’s audit program.


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 implementation and compliance with such policies and all other applicable
requirements. The banking agencies will monitor compliance 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 connection with sales activities involving nondeposit investment
products will be subject to criticism and appropriate corrective action.

Questions on the Statement may be submitted to:
FRB — Division of Banking Supervision and Regulation, Securities Regulation
Section, (202) 452-2781; Legal Division, (202) 452-2246.
FDIC — Office of Policy, Division of Supervision, (202) 898-6759;
Regulation and Legislation Section, Legal Division (202) 898-3796.
OCC -- Office of the Chief National Bank Examiner, Capital Markets Group,
(202) 874-5070.
OTS — Office of Supervision Policy, (202) 906-5740; Corporate and
Securities Division, (202) 906-7289.

Supervision & Regulation
Federal Reserve Board

Federal Deposit Insurance Corporation

' T . fajU A A C Susan F. Krause
Senior Deputy Comptroller for
Bank Supervision Policy
Office of the Comptroller o f the

EFFECTIVE DATE: February 15, 1994

John C. Price
Acting Assistant Director for Policy
Office of Thrift Supervision

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102