I

103D CONGRESS

1ST SESSION H. R. 3306

To amend the Federal Deposit Insurance Act to regulate the retail sale

of nondeposit investment products by insured depository institutions to

prevent customer confusion about the uninsured nature of the products,

and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

OCTOBER 19, 1993

Mr. GONZALEZ (for himself and Mr. SCHUMER) introduced the following bill;

which was referred to the Committee on Banking, Finance and Urban Affairs

A BILL

To amend the Federal Deposit Insurance Act to regulate

the retail sale of nondeposit investment products by insured depository institutions to prevent customer confusion about the uninsured nature of the products, and

for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Depository Institution

5 Retail Investment Sales and Disclosure Act’’.
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1 SEC. 2. REGULATION OF RETAIL SALES OF NONDEPOSIT IN2 VESTMENT PRODUCTS BY INSURED DEPOSI3 TORY INSTITUTIONS.

4 The Federal Deposit Insurance Act is amended by

5 adding at the end the following new section:

6 ‘‘SEC. 44. REGULATION OF RETAIL SALES OF NONDEPOSIT

7 INVESTMENT PRODUCTS BY INSURED DEPOS8 ITORY INSTITUTIONS.

9 ‘‘(a) DEFINITIONS.—For purposes of this section:

10 ‘‘(1) BANKING OFFICE.—The term ‘banking of11 fice’ means any office, or any part of any office, of

12 an insured depository institution that is commonly

13 accessible to the general public for the purpose of

14 accepting or withdrawing deposits.

15 ‘‘(2) NONDEPOSIT INVESTMENT PRODUCT.—

16 The term ‘nondeposit investment product’—

17 ‘‘(A) means any investment product which

18 is not a deposit;

19 ‘‘(B) includes shares issued by a registered

20 investment company; and

21 ‘‘(C) does not include—

22 ‘‘(i) any loan or other extension of

23 credit by an insured depository institution;

24 ‘‘(ii) any letter of credit; or

25 ‘‘(iii) any other instrument or invest26 ment product specifically excluded from
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1 the definition of such term by regulations

2 prescribed jointly by the Federal banking

3 agencies.

4 ‘‘(b) SCOPE OF APPLICATION.—

5 ‘‘(1) APPLICATION LIMITED TO RETAIL ACTIVI6 TIES.—The provisions of this section shall not apply

7 with respect to any transaction (which is otherwise

8 subject to the requirements of this section)

9 between—

10 ‘‘(A) any insured depository institution,

11 any affiliate of such institution, or any other

12 person who is subject, directly or indirectly, to

13 the requirements of this section; and

14 ‘‘(B) any other insured depository institu15 tion, any affiliate of another insured depository

16 institution, any broker or dealer registered

17 under the Securities Exchange Act of 1934, any

18 person who is, or meets the requirements for,

19 an accredited investor, as such term is defined

20 in section 2(15)(i) of the Securities Act of

21 1933, or any other customer who the appro22 priate Federal banking agency determines, on

23 the basis of the financial sophistication of the

24 customer, does not need the protection afforded

25 by this section.
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1 ‘‘(2) NO EFFECT ON OTHER AUTHORITY.—

2 ‘‘(A) IN GENERAL.—No provision of this

3 section shall be construed as limiting or other4 wise affecting—

5 ‘‘(i) any authority of the Securities

6 and Exchange Commission, any self-regu7 latory organization, the Municipal Securi8 ties Rulemaking Board, or the Secretary of

9 the Treasury under any Federal securities

10 law; or

11 ‘‘(ii) the applicability of any Federal

12 securities law, or any rule or regulation

13 prescribed by the Commission, any self14 regulatory organization, the Municipal Se15 curities Rulemaking Board, or the Sec16 retary of the Treasury pursuant to any

17 such law, to any person.

18 ‘‘(B) DEFINITIONS.—For purposes of this

19 paragraph:

20 ‘‘(i) FEDERAL SECURITIES LAW.—The

21 term ‘Federal securities law’ has the mean22 ing given to the term ‘securities laws’ in

23 section 3(a)(47) of the Securities Ex24 change Act of 1934.
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1 ‘‘(ii) SELF-REGULATORY ORGANIZA2 TION.—The term ‘self-regulatory organiza3 tion’ has the meaning given to such term

4 in section 3(a)(26) of the Securities Ex5 change Act of 1934.

6 ‘‘(c) PROHIBITION ON MISLEADING AND DECEPTIVE

7 PRACTICES.—

8 ‘‘(1) IN GENERAL.—An insured depository in9 stitution may not permit any person to engage in

10 any practice, or employ any advertising, at any of11 fice of, or on behalf of, the institution which could

12 mislead any person or otherwise cause a reasonable

13 person to reach an erroneous belief with respect to—

14 ‘‘(A) the uninsured nature of any

15 nondeposit investment product sold, or offered

16 for sale, by—

17 ‘‘(i) the institution (in any capacity)

18 or any affiliate of the institution; or

19 ‘‘(ii) any other person in any office of,

20 or on behalf of, the institution; or

21 ‘‘(B) the investment risk associated with

22 any such product.

23 ‘‘(2) CONTENTS OF REGULATIONS.—The Fed24 eral banking agencies shall jointly prescribe rules of

25 fair practice governing retail sales, including phone
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1 sales and direct mail solicitations, of nondeposit in2 vestment products by, on behalf of, or in any office

3 of, any insured depository institution (in any capac4 ity) and any affiliate of such institution.

5 ‘‘(3) RULES OF FAIR PRACTICE.—In prescribing

6 regulations pursuant to paragraph (2), the Federal

7 banking agencies shall take into account the Rules

8 of Fair Practice of the National Association of Secu9 rity Dealers and any other applicable rules or regu10 lations the agencies determine to be appropriate.

11 ‘‘(d) DISCLOSURE REQUIREMENTS.—

12 ‘‘(1) WRITTEN DISCLOSURES.—An insured de13 pository institution shall require any person who

14 sells or offers for sale any nondeposit investment

15 product in any office of, or on behalf of, the institu16 tion to disclose, in writing, to any person who seeks

17 to purchase, or seeks an opinion or investment ad18 vice about, any such product the following informa19 tion:

20 ‘‘(A) The nondeposit investment product is

21 not insured by the Federal Deposit Insurance

22 Corporation, the United States Government, or

23 the institution.

24 ‘‘(B) The product poses some investment

25 risk and the risk may involve the loss of prin-
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1 cipal such that when the product is sold by the

2 investor, it may be worth less than when pur3 chased by the investor.

4 ‘‘(C) A clear description of the relationship

5 between the insured depository institution and

6 any other person which originated the product

7 or is otherwise directly or indirectly involved

8 with underwriting, selling, or distributing the

9 product.

10 ‘‘(D) If the nondeposit investment product

11 consists of shares issued by a registered invest12 ment company, the relationship between the in13 sured depository institution, or any affiliate of

14 the institution, and the investment company.

15 ‘‘(2) CUSTOMER’S SIGNED STATEMENT RELAT16 ING TO INITIAL PURCHASE OF NONDEPOSIT INVEST17 MENT PRODUCTS.—

18 ‘‘(A) IN GENERAL.—An insured depository

19 institution shall require any person selling a

20 nondeposit investment product at any office of,

21 or on behalf of, the institution to obtain, at the

22 time of the initial purchase by any person of

23 such product, a separate statement, signed and

24 dated by such person, which contains the dec25 laration that the purchaser has received, read,
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1 and understood the disclosures required under

2 paragraph (1) with respect to such investment

3 product.

4 ‘‘(B) FORMAT OF DECLARATION.—The

5 declaration required under subparagraph (A)

6 shall be in a conspicuous and prominent loca7 tion on a sheet of paper which is separate from

8 a written application or any other document or

9 paper which such person signs or obtains in

10 connection with the initial purchase of a

11 nondeposit investment product.

12 ‘‘(C) SCOPE OF APPLICATION; TIMING.—

13 The declaration required to be obtained under

14 subparagraph (A) from any person shall be ob15 tained for the initial purchase of each type of

16 nondeposit investment product purchased by

17 the person before each such transaction is final.

18 ‘‘(3) DISCLOSURES IN THE CASE OF SUBSE19 QUENT PURCHASES THROUGH ELECTRONIC OR

20 TELEPHONE TRANSFERS.—In the case of a purchase

21 (other than an initial purchase) by any person of a

22 nondeposit investment product through, or in con23 junction with, an electronic funds transfer (as de24 fined in section 903(6) of the Electronic Fund

25 Transfer Act), a visual or oral notice may be pro-
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1 vided (through the device used by the purchaser to

2 carry out such transfer), in lieu of the written disclo3 sure required under paragraph (1), reminding the

4 purchaser that the nondeposit investment product is

5 not a deposit which is insured by the Federal De6 posit Insurance Corporation, the United States Gov7 ernment, or the institution and poses some invest8 ment risk.

9 ‘‘(4) MODEL FORMS.—The Federal banking

10 agencies shall jointly prescribe regulations establish11 ing model forms which meet or exceed the minimum

12 requirements of this subsection.

13 ‘‘(5) ADVERTISING AND PROMOTIONAL MATE14 RIAL.—Any advertisement, solicitation, or pro15 motional or sales material which relates to any

16 nondeposit investment product which is sold, or of17 fered for sale, at any office of, or on behalf of, an

18 insured depository institution (including any solicita19 tion contained in any periodic statement issued by

20 the institution), and any sale confirmation notice or

21 periodic statement issued in connection with any

22 such product, shall contain the disclosures required

23 under paragraph (1).

24 ‘‘(e) LOCATION REQUIREMENTS.—
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1 ‘‘(1) SALE OF PRODUCTS PROHIBITED IN AREA

2 WHERE DEPOSITS ARE ACCEPTED.—

3 ‘‘(A) IN GENERAL.—No insured depository

4 institution may permit any part of any banking

5 office of the institution to be used for selling or

6 offering for sale, or for providing any opinion or

7 investment advice with respect to, any

8 nondeposit investment product.

9 ‘‘(B) PHYSICALLY SEGREGATED AREA.—

10 The area in which any nondeposit investment

11 product is sold or offered for sale, or any opin12 ion or investment advice with respect to such

13 product is provided, shall not be treated, for

14 purposes of paragraph (1), as being part of a

15 banking office of an insured depository institu16 tion if such area is physically segregated from

17 the part of the office where deposits are accept18 ed or withdrawn.

19 ‘‘(2) POSTING OF NOTICE IN AREA OF SALES.—

20 An insured depository institution shall post, in a

21 conspicuous place in that part of any office of the

22 institution in which any nondeposit investment prod23 uct is sold or offered for sale, a notice that—

24 ‘‘(A) such part of the office is devoted to

25 the sale of nondeposit investment products
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1 which are not insured by the Federal Deposit

2 Insurance Corporation, the United States Gov3 ernment, or the institution; and

4 ‘‘(B) deposits are not accepted at that lo5 cation.

6 ‘‘(f) EMPLOYEE SALES, TRAINING, AND COMPENSA7 TION.—

8 ‘‘(1) CERTAIN PERSONS PROHIBITED FROM

9 SELLING NONDEPOSIT INVESTMENT PRODUCTS.—An

10 insured depository institution may not permit any

11 person who accepts deposits from the public at any

12 office of, or on behalf of, an insured depository insti13 tution to sell or offer to sell, or offer an opinion or

14 investment advice on, any nondeposit investment

15 product.

16 ‘‘(2) REFERRAL.—Notwithstanding paragraph

17 (1), a person who accepts deposits from the public

18 at any office of, or on behalf of, an insured deposi19 tory institution may refer a customer who seeks to

20 purchase, or seeks an opinion or investment advice

21 on, any nondeposit investment product to a person,

22 or the phone number of a person, who sells or pro23 vides opinions or investment advice on such product

24 only if—
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1 ‘‘(A) the customer explicitly requests such

2 referral; and

3 ‘‘(B) the person who accepts deposits—

4 ‘‘(i) does not solicit such request;

5 ‘‘(ii) discloses to the customer that

6 such product is not insured by the institu7 tion, the Federal Deposit Insurance Cor8 poration, or the United States Govern9 ment, or the institution; and

10 ‘‘(iii) does not receive any compensa11 tion for the referral.

12 ‘‘(3) QUALIFICATION REQUIREMENTS.—

13 ‘‘(A) IN GENERAL.—No insured depository

14 institution may permit any person to sell or

15 offer for sale, or provide an opinion or invest16 ment advice about, any nondeposit investment

17 product in any part of any office of the institu18 tion, or on behalf of the institution, unless such

19 person—

20 ‘‘(i) is registered with the Securities

21 and Exchange Commission as a broker or

22 dealer, as a representative of a broker or

23 dealer, or as an investment adviser; or

24 ‘‘(ii) meets qualification and training

25 requirements which the Federal banking
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1 agencies jointly determine are equivalent to

2 the training and qualification requirements

3 applicable to a person who is registered

4 with the Commission as a broker or dealer,

5 as a representative of a broker or dealer,

6 or as an investment adviser, as the case

7 may be.

8 ‘‘(B) SUITABILITY OF INVESTMENT.—The

9 training required under subparagraph (A)(ii)

10 shall include training in making an accurate

11 judgment about the suitability of a particular

12 nondeposit investment product for a prospective

13 customer.

14 ‘‘(4) COMPENSATION STANDARDS.—The Fed15 eral banking agencies shall prescribe regulations es16 tablishing minimum requirements for insured deposi17 tory institution compensation programs that are de18 signed to ensure that the programs do not operate

19 as, and do not have the effect of providing, an incen20 tive for the sale of nondeposit investment products

21 to any customer in lieu of a more suitable invest22 ment option for such customer.

23 ‘‘(g) USE OF NAMES OF DEPOSITORY INSTITU24 TIONS.—
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1 ‘‘(1) IN GENERAL.—No insured depository in2 stitution, and no affiliate of any insured depository

3 institution, may use or permit any other person to

4 use the name, title, or logo of such institution or any

5 word or design which is the same as or similar to,

6 or a variation of, the name, title, or logo of such in7 stitution in connection with—

8 ‘‘(A) the name of any investment company

9 for which the institution or affiliate acts as in10 vestment adviser; or

11 ‘‘(B) any nondeposit investment product—

12 ‘‘(i) which is offered for sale by the

13 institution or affiliate or by any other per14 son at any office of, or on behalf of, the in15 stitution; or

16 ‘‘(ii) with respect to which the institu17 tion, affiliate, or other person provides an

18 opinion or investment advice.

19 ‘‘(2) TRANSITION RULE.—During the 6-month

20 period beginning on the date of the enactment of the

21 Depository Institution Retail Investment Sales and

22 Disclosure Act, paragraph (1) shall not apply to the

23 use of the name, title, or logo of an insured deposi24 tory institution, or of any word or design which is

25 the same as or similar to, or a variation of, the
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1 name, title, or logo of such institution, in a manner

2 otherwise prohibited by paragraph (1) if such use

3 began before such date of enactment.

4 ‘‘(3) POST-TRANSITION USE OF PRIOR NAMES

5 WHICH ARE NOT CONFUSING OR DECEPTIVE.—Not6 withstanding paragraph (1) or (2), if the use of the

7 name, title, or logo of an insured depository institu8 tion, or of a word or design which is the same as

9 or similar to, or a variation of, the name, title, or

10 logo of such institution, in a manner otherwise pro11 hibited by paragraph (1) began before the date of

12 the enactment of the Depository Institution Retail

13 Investment Sales and Disclosure Act, the appro14 priate Federal banking agency may permit such use

15 to continue after the end of the 6-month period re16 ferred to in paragraph (2) if the agency determines,

17 in writing and on a case-by-case basis, that such use

18 is unlikely to mislead any person or otherwise cause

19 a reasonable person to reach an erroneous belief

20 with respect to—

21 ‘‘(A) the uninsured nature of any

22 nondeposit investment product sold, or offered

23 for sale, by—

24 ‘‘(i) the institution (in any capacity)

25 or any affiliate of the institution; or
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1 ‘‘(ii) any other person in any part of

2 any office of the institution; or

3 ‘‘(B) the investment risk associated with

4 any such instrument or product.

5 ‘‘(h) REQUIREMENTS RELATING TO CONFIDENTIAL

6 CUSTOMER INFORMATION.—

7 ‘‘(1) DISCLOSURES OF CONFIDENTIAL CUS8 TOMER INFORMATION PROHIBITED.—

9 ‘‘(A) IN GENERAL.—No insured depository

10 institution may disclose, directly or indirectly,

11 any confidential customer information to any

12 person, including any affiliate of such institu13 tion, without the prior written consent of the

14 customer.

15 ‘‘(B) RECORDS OF CUSTOMER CONSENT.—

16 Whenever any insured depository institution ob17 tains the prior written consent of a customer

18 for purposes of subparagraph (A), the affiliate

19 shall—

20 ‘‘(i) obtain an acknowledgment of

21 such consent by the customer, including

22 the date the consent was acknowledged

23 and the customer’s name, address, and any

24 applicable account number;
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1 ‘‘(ii) inform the customer that the

2 consent (and the disclosure of the con3 fidential information) may not be not re4 quired as a condition for the performance

5 of services for the customer; and

6 ‘‘(iii) maintain records of compliance

7 with clauses (i) and (ii).

8 ‘‘(C) CUSTOMER DEFINED.—

9 ‘‘(i) IN GENERAL.—For purposes of

10 this subparagraph, the term ‘customer’

11 means any person who, after the date of

12 enactment of the Depository Institution

13 Retail Investment Sales and Disclosure

14 Act, establishes a deposit, trust, or credit

15 relationship with an insured depository in16 stitution.

17 ‘‘(ii) TREATMENT OF CERTAIN DEPOS18 ITS.—Any renewal of an account in an in19 sured depository institution and any roll20 over of a deposit in any such account shall

21 be treated as the establishment of a new

22 deposit relationship for purposes of clause

23 (i).

24 ‘‘(D) TREATMENT OF SEPARATELY IDEN25 TIFIABLE DEPARTMENT OR DIVISION.—For
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1 purposes of this paragraph, the term ‘affiliate’

2 includes a separately identifiable department or

3 division of an insured depository institution

4 that is registered as an investment adviser pur5 suant to the Investment Advisers Act of 1940.

6 ‘‘(2) CONFIDENTIAL CUSTOMER INFORMATION

7 DEFINED.—

8 ‘‘(A) IN GENERAL.—For purposes of para9 graph (1), the term ‘confidential customer in10 formation’ means financial information regard11 ing any specific individual which has been de12 rived from any record of any insured depository

13 institution and pertains to the individual’s rela14 tionship with the institution.

15 ‘‘(B) CERTAIN INFORMATION NOT IN16 CLUDED IN DEFINITION.—Notwithstanding any

17 provision of paragraph (1), the term ‘confiden18 tial customer information’ shall not include—

19 ‘‘(i) any information obtainable from

20 an unaffiliated credit bureau or similar en21 tity or information obtainable in the ordi22 nary course of business from any other un23 affiliated entity;
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1 ‘‘(ii) any information provided to any

2 credit bureau or similar entity in the ordi3 nary course of business;

4 ‘‘(iii) any information provided—

5 ‘‘(I) to any appropriate Federal

6 regulatory agency; or

7 ‘‘(II) in accordance with the

8 Right to Financial Privacy Act of

9 1978 to any Government authority (as

10 defined in section 1101(3) of such

11 Act); and

12 ‘‘(iv) financial information the use of

13 which (by an insured depository institu14 tion, any affiliate of such institution, or

15 any agent of or contractor with such insti16 tution or affiliate) is limited to the per17 formance of—

18 ‘‘(I) any function which is nec19 essary to maintain a customer’s exist20 ing deposit, trust, or credit account

21 with the institution, including the col22 lection of any amount due the institu23 tion by the customer with respect to

24 any such account; or
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1 ‘‘(II) due diligence evaluations in

2 connection with the purchase or sale

3 of loan assets or servicing rights.

4 ‘‘(3) DISCLOSURE OF ADDITIONAL CUSTOMER

5 INFORMATION.—In addition to any requirement or

6 limitation contained in this section, the appropriate

7 Federal banking agency may prescribe regulations

8 limiting disclosures of nonpublic customer informa9 tion from any insured depository institution to any

10 affiliate of such institution, including an evaluation

11 of the creditworthiness of an issuer or other cus12 tomer of that insured depository institution or any

13 affiliate of such institution.

14 ‘‘(i) COMPLIANCE REQUIREMENT.—

15 ‘‘(1) IN GENERAL.—In conducting any exam16 ination of an insured depository institution, the ap17 propriate Federal banking agency shall include an

18 examination of the institution’s record of compliance

19 with the provisions of this section and the institu20 tion’s procedures for ensuring such compliance.

21 ‘‘(2) PROCEDURES.—An insured depository in22 stitution which permits any person who is not an of23 ficer or employee of the institution to sell or offer

24 for sale, or provide an opinion or investment advice

25 on, nondeposit investment products on behalf of the
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1 institution or in any part of any office of the institu2 tion shall establish procedures to ensure that the re3 quirements of this section are met by such person.

4 ‘‘(3) TESTERS.—It is the sense of the Congress

5 that the Federal banking agencies should conduct

6 testing of insured depository institution practices

7 with regard to selling, and providing opinions and

8 investment advice on, nondeposit investment prod9 ucts using testers who, without an intent to pur10 chase such products, pose as prospective purchasers

11 of such products for the purpose of collecting evi12 dence of violations of this section and regulations

13 prescribed under this section.’’.

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