Uninsured Investment Products: A Pocket Guide for Financial Institutions
Financial Institution Directors
The financial marketplace has never provided consumers with as wide an array of choices as it does today. New investment products are being created at an unparalleled rate, and the competition among financial services providers has grown far beyond what many of the strongest proponents envisioned when Congress began updating the laws governing our financial system nearly two decades ago.
Without question, these changes have produced tremendous benefits for our banks, savings institutions and their customers. And, there is little doubt there will be more changes, more competition and more benefits ahead of us. Confronting your institutions, however, is an immense challenge. Put simply, it is how to accommodate your customers' need for a safe, insured savings depository while also helping them distinguish between insured products and uninsured investment products.
Since Federal deposit insurance was created more than 60 years ago, we have grown accustomed to the security of the deposit insurance safety net. Your customers should continue to rely with confidence on the protection provided by FDIC deposit insurance. But it is your responsibility to make it clear to them that this protection has not been extended to the nondeposit investment products now available from FDIC-insured financial institutions.
This pocket guide was developed to help your managers and line supervisors structure your nondeposit investment products sales programs so that your customers can make an informed decision about how best to manage their money. We have answered some of the questions most frequently asked regarding current regulatory requirements, and included some key telephone numbers for your use as the requirements change to reflect the evolution of the marketplace. We encourage you to call with your questions. Working together, we can make sure your customers are well-informed about the products they buy. After all, a well-informed customer is the best consumer.
Federal Deposit Insurance Corporation
May 28, 1997
Q. What guidance have the Federal banking agencies issued regarding how financial institutions insured by the Federal Deposit Insurance Corporation (FDIC) should conduct their uninsured investments sales programs?
A. In February 1994, the FDIC, the Federal Reserve Board of Governors, the Comptroller of the Currency and the Office of Thrift Supervision issued the "Interagency Statement on Retail Sales of Nondeposit Investment Products." The Interagency Statement was developed to eliminate customer confusion regarding what is insured and not insured among the various products available from FDIC-insured depository institutions. The Interagency Statement emphasizes the need to clearly identify the differences between traditional insured deposit products and the newer uninsured products now available at many banks and savings institutions. The Interagency Statement requires that an institution's board of directors adopt written policies and procedures and implement general guidelines before initiating a nondeposit investment product sales program. The Interagency Statement addresses: (1) how the location of uninsured nondeposit products sales activities should be distinguished from other retail banking services within a financial institution; (2) training of nondeposit investment products sales representatives; (3) how sales representatives should assess the suitability of uninsured investment products for your customers; (4) compensation arrangements for bank employees for direct or indirect sales activities; (5) use of depositor information in nondeposit investment product sales programs; (6) what must be disclosed about the uninsured investment products you are selling; and (7) when the required disclosures must be made.
Q. What is a nondeposit investment product?
A. Any product with an investment component that is not an insured deposit is subject to the Interagency Statement. Stocks, bonds, government and municipal securities, mutual funds, annuities (fixed and variable), life insurance policies (whole and variable), and savings bonds are nondeposit investment products. Savings bonds are included because they are not insured. Purchasers of savings bonds must be told they are not insured, but the rest of the Interagency Statement's provisions are not applicable. Sweep accounts may or may not be covered by the Interagency Statement. Applicability depends upon whether the underlying investment is a deposit.
Retail versus Institutional and Trust Sales
Q. Are all sales of nondeposit investment products subject to the Interagency Statement?
A. No. Only retail sales initiated in an institution's lobby or sales resulting from the institution's referrals are covered. Recommendations or sales to small businesses, institutional or corporate accounts are covered only if they are made in the same location or manner as retail sales to general consumers. Sales through a money desk or dealer desk are not considered retail sales and, therefore, are not covered. Trust department sales to fiduciary accounts also are not covered. Hybrid accounts, such as self-directed IRA accounts and Keogh plans, are subject to the Interagency Statement if the customer retains investment discretion and the underlying investment is a nondeposit investment product.
Q. May nondeposit investment products be sold in an insured financial institution's lobby?
A. Yes. The guidelines state that sales of nondeposit investment products can take place in an institution's lobby as long as the sales area is "physically distinct" from the deposit-taking area. Problems arise because retail customers perceive that all financial instruments available at the teller window or in the lobby are insured. Therefore, it is critical that the customer be able to distinguish between the area where insured deposit business is conducted and the area where uninsured investment products are sold. Signs, dividers, plants or other techniques can and should be used to make the sales area "physically distinct." Although not required, many financial institutions use separate offices for nondeposit investment product sales.
Q. Does the Interagency Statement prohibit the recommendation and sale of nondeposit investment products from shopping mall or supermarket kiosks where space is so limited that the sales area cannot be made "physically distinct" from the deposit-taking area?
A. No. However, where physical limitations prevent the establishment of distinct areas, depository institutions have a heightened responsibility to ensure that customers understand that the nondeposit investment products are not insured. Kiosk employees also must be appropriately trained before they recommend or sell nondeposit investment products.
Q. Does the Interagency Statement also apply to recommendations and sales that take place outside of an institution's lobby?
A. Yes. The Interagency Statement applies to all retail sales activities wherever they occur. Telemarketing campaigns, Internet web sites, mass mailings and any other method used must comply with the guidelines. The Interagency Statement also applies to referrals by an institution to an off-site vendor if the institution receives compensation for the referral. An institution's subsidiaries or affiliates are considered vendors subject to the requirements of the Interagency Statement.
Q. May nondeposit investment products be sold through a trust department?
A. Yes and no. Trust departments recommend, buy and sell nondeposit investment products for trust customers. The Interagency Statement does not cover recommendations and sales of nondeposit investment products to "fiduciary accounts." Trust departments cannot, however, make retail sales of nondeposit investment products. Retail sales are not trust department activities, and institutions should not direct retail customers to the trust department for nondeposit investment product sales.
Q. May insured institutions use their own employees to sell nondeposit investment products, or must they use registered representatives of broker/dealers or insurance agents?
A. An insured institution can do either. In the three typical program structures, an institution uses: (1) its own employees; (2) "networking" arrangements with vendors such as broker/dealers or insurance agencies who use their own employees; or (3) a "dual employee" arrangement, which is a type of networking arrangement involving use of both a vendor and the institution's employees. The networking arrangement is the most widely used program structure.
Q. Who is responsible for an insured institution's employees who act as "dual employees" for vendors offering nondeposit investment products?
A. While the contract with the vendor should set forth the rights and obligations of all parties, a vendor is typically responsible for supervising dual employees who recommend and sell nondeposit investment products. The Interagency Statement recognizes that "dual employee" arrangements are common and requires that there be written employment contracts for such employees.
Q. Does the Interagency Statement apply to sales by vendors operating under a networking arrangement? What about an institution's subsidiaries and affiliates?
A. Even though vendors such as broker/dealers and insurance agents are primarily subject to other Federal or state agencies and the rules they establish, the Interagency Statement requires insured institutions entering into "networking" or "dual employee" arrangements to have as part of their contract a requirement that the vendor comply with all applicable laws and regulations, including the Interagency Statement. An institution's subsidiaries and affiliates are vendors subject to the requirements of the Interagency Statement.
Q. Do the guidelines apply to retail sales programs that are limited to referrals to a registered broker/dealer's toll-free telephone number?
A. Yes, but only if the financial institution receives compensation--cash or services--from the broker/dealer in exchange for referrals of its customers.
Q. What other provisions are required in contractual agreements with vendors who recommend and sell nondeposit products on and off the institution's premises?
A. The Interagency Statement requires that written agreements be executed with vendors and that such agreements should be reviewed and approved by an institution's board of directors. These written agreements must: (1) include a description of duties and responsibilities of both the institution and the vendor; (2) require vendor compliance with all applicable laws and with the Interagency Statement; (3) provide for vendor indemnification of the depository institution for any actions or costs arising out of the nondeposit investment product program; (4) provide for access to the vendor's records by the institution and by the appropriate Federal banking agency; (5) include terms defining the use of the institution's space, personnel and equipment; (6) describe compensation arrangements for institution and vendor personnel; and (7) include employment contracts for dual employees.
Sales by an Institution's Employees
Q. Are there restrictions on which employees can be used to sell nondeposit investment products directly?
A. Any employee who receives appropriate training is eligible to recommend or sell nondeposit investment products. The Interagency Statement attempts to eliminate customer confusion regarding the uninsured status of nondeposit investment products by restricting where nondeposit investment products can be recommended and sold. Employees who receive deposits, cash checks or open new accounts--such as tellers located behind the deposit counter (kiosk arrangements excepted) or officers at new account desks--are not permitted to recommend or sell nondeposit investment products from these types of locations. However, these same employees would be permitted to recommend or sell such products if they are positioned at a location "physically distinct" from the deposit counter or the new accounts desk.
Q. What type of training is required for employees who recommend and sell nondeposit investment products?
A. The type of training and supervision required depends on the products an employee will sell. Those employees who recommend and sell only mutual funds should have training comparable to what a broker/dealer's registered representative obtains prior to taking and passing the Series 6 examination administered by the National Association of Securities Dealers (NASD). Employees who also sell stocks and bonds should have training commensurate with that of a registered representative who has taken and passed the Series 7 examination. In December 1996, the Federal banking agencies proposed regulations that, if adopted, will require that employees of financial institutions meet qualification requirements similar to those used in the securities industry if they are going to recommend or sell mutual funds, stocks or bonds. If employees sell insurance products, they should have the type of training insurance agents receive and obtain the appropriate licenses.
Q. May an insured institution provide information on its customers to a vendor offering nondeposit investment products?
A. Financial institutions must establish written policies regarding the use and release of customer information to vendors. Each institution should review applicable state laws regarding use and ownership of customer records and customer privacy rights prior to establishing written policies and procedures in this area.
Q. What disclosures does the Interagency Statement require insured institutions to make to customers who are interested in purchasing nondeposit investment products?
A. The Federal banking agencies decided that one of the best ways to eliminate customer confusion was to require that the following three disclosures be made: (1) nondeposit investment products are not insured by the FDIC; (2) nondeposit investment products are not obligations of, or guaranteed by, the financial institution; and (3) nondeposit investments will subject the purchaser to investment risk, including possible loss of the principal amount invested.
Q. When must a sales representative make the required disclosures?
A. There are several points at which a sales representative must provide the required disclosures. They are when: (1) a sales presentation is given; (2) an account is opened; and (3) a sale of a nondeposit investment product is made.
Q. What may a teller or receptionist tell a customer about the institution's nondeposit investment product sales program?
A. Tellers and receptionists are permitted to "direct" customers to sales representatives, but should not open accounts, qualify customers or take orders for nondeposit investment products. A teller or receptionist would not be required to make the mandatory disclosures if he or she is simply directing the customer to the appropriate sales representative. The required disclosures are triggered when a sales presentation occurs.
Q. When does a sales presentation begin?
A. A sales presentation begins when a sales representative starts to discuss particular attributes of specific nondeposit investment products. Statements such as "We have mutual funds, annuities, life insurance, stocks and bonds available at the desk over there" or "Acme mutual funds and Xtra Life annuities are available through the investment center" are not considered sales presentations because they are "directional" in nature and do not involve a discussion of the particular attributes of a specific nondeposit investment product.
Q. Do sales representatives have to make the required disclosures in telephone solicitations?
A. Yes. The required disclosures must be made in telephone solicitations and other forms of telemarketing. The disclosures must be given when a sales presentation begins, even if the recommendation or sale is being made over the telephone.
Q. Is a sales representative required to obtain a written acknowledgment from customers documenting that they have received the required disclosures?
A. Yes. A statement, signed by the customer, should be obtained when an account is opened acknowledging that the customer has received and understands the disclosures. If an institution's sales are made through a vendor, the vendor should obtain the signed acknowledgments.
Q. Do financial institutions have to make the required disclosures on account statements and confirmations?
A. Yes. The Interagency Statement requires nondeposit investment product account statements and confirmations to have, at a minimum, the three mandatory disclosures. This requirement also applies to account statements that show both deposit and nondeposit investment product balances. The Federal banking agencies have approved the disclosure logo shown below.
Q. May an institution pay its employees referral fees?
A. Yes. Financial institutions are permitted to pay their employees a one-time, nominal referral fee. The fee must not be contingent on a transaction taking place. The Interagency Statement does not prohibit vendors from paying referral fees to a financial institution's employees. However, the NASD has indicated that it would be impermissible for NASD member broker/dealers to make such payments.
Q. Is it the responsibility of an insured institution's management to monitor whether its vendor or the institution's direct sales representatives have evaluated the suitability of nondeposit investment products being recommended or sold to customers?
A. Yes. A financial institution engaged in direct sales should have reasonable grounds for believing that the specific nondeposit investment product recommended by its employee is suitable for the potential purchaser. Before a sales representative makes any recommendations, information must be obtained from the customer regarding financial status, tax status, investment objectives, risk tolerance and such other information that may be useful or reasonable in making investment recommendations. An institution's management is responsible for making sure that in all forms of networking arrangements its vendors have adequate systems and procedures in place for conducting this "suitability" analysis.
Supervision of Third-Party Sales Programs
Q. What type of oversight must management exercise over vendors operating on a financial institution's premises or off-site location?
A. An institution's management is responsible for overseeing its vendors regardless of whether they are operating on or off-site. Typical oversight would include reviewing: (1) the types and volume of products being sold; (2) the number of opened and closed accounts; (3) new products being offered; (4) discontinued products; and (5) customer complaints and their resolution.
Q. What is an institution's management expected to do in the area of customer complaints?
A. An institution's management is expected to be aware of and investigate all customer complaints, and document how such complaints are being resolved. This applies to both direct sales programs and networking arrangements administered by vendors. A financial institution's management should frequently review customer complaints with the institution's vendor to determine what changes or additional training is necessary to avoid future problems.
Q. What should an institution do if it becomes aware of problems with a specific registered representative who is an employee of the institution's vendor?
A. A financial institution is responsible for making sure that the vendor is supervising its employees adequately. Financial institutions should receive periodic reports from their vendors describing the number and seriousness of complaints and how they are resolved. The financial institution should discuss serious or frequent complaints concerning a specific sales representative with its vendor. If warranted, the institution should consider requesting that the registered representative be replaced. If the vendor does not take appropriate action, the financial institution should alert the FDIC or appropriate Federal banking regulator and consider referring the problem to the NASD or the Securities & Exchange Commission (SEC).
If you have questions regarding nondeposit investment products or the Interagency Statement, or if you would like a copy of the Interagency Statement, please contact:
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
(877) 275-3342 or (877) ASK-FDIC
For the hearing impaired call 1 (800) 925-4618 or 1 (703) 562-2289 in the Washington, D.C. area
Board of Governors of the Federal Reserve System
20th & C Streets, N.W.
Washington, D.C. 20551
Office of the Comptroller of the Currency
Customer Assistance Group,
1301 McKinney Street, Suite 3450
Houston, TX 77010
Office of Thrift Supervision
Department of the Treasury
1700 G Street, N.W.
Washington, D.C. 20552
Other information about investment products and securities sales practices is available by contacting:
The Financial Industry Regulatory Authority
(formerly The National Association of Securities Dealers)
The Securities and Exchange Commission
Office of Investor Education and Assistance
450 5th Street, N.W.
Mail Stop 11-2
Washington, D.C. 20549