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 
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  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  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  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  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  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  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  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  prepared
by or on behalf of a third party vendor 
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  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  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      Division of Banking Supervision and
          Regulation, Securities Regulation
          Section, (202) 452-2781; Legal Divi-
          sion, (202) 452-2246.
FDIC     Office of Policy,  Division of   
          Supervision,  (202) 898-6759; 
          Regulation and Legislation Sec-
          tion, 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.

Effective date:  February 15, 1994