II

104TH CONGRESS

1ST SESSION S. 633

To amend the Federal Deposit Insurance Act to provide certain consumer

protections if a depository institution engages in the sale of nondeposit

investment products, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MARCH 28 (legislative day, MARCH 27), 1995

Mr. PRYOR introduced the following bill; which was read twice and referred

to the Committee on Banking, Housing, and Urban Affairs

A BILL

To amend the Federal Deposit Insurance Act to provide

certain consumer protections if a depository institution

engages in the sale of nondeposit investment 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 ‘‘Bank Customer Con5 fidentiality and Protection Act of 1995’’.
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1 SEC. 2. CUSTOMER PROTECTIONS REGARDING

2 NONDEPOSIT INVESTMENT PRODUCTS.

3 (a) AMENDMENT TO THE FEDERAL DEPOSIT INSUR4 ANCE ACT.—Section 18 of the Federal Deposit Insurance

5 Act (12 U.S.C. 1828) is amended by adding at the end

6 the following new subsection:

7 ‘‘(q) SAFEGUARDS FOR SALE OF NONDEPOSIT IN8 VESTMENT PRODUCTS.—

9 ‘‘(1) DEFINITIONS.—For purposes of this sub10 section—

11 ‘‘(A) the terms ‘broker’, ‘dealer’, and ‘reg12 istered broker or dealer’ have the same mean13 ings as in section 3 of the Securities Act of

14 1934;

15 ‘‘(B) the term ‘customer’—

16 ‘‘(i) means any person who maintains

17 or establishes a deposit, trust, or credit re18 lationship with an insured depository insti19 tution;

20 ‘‘(ii) includes any person who renews

21 an account in an insured depository insti22 tution and any person who rolls over a de23 posit in any such account; and

24 ‘‘(iii) any person who contacts an in25 sured depository institution, in person or

26 otherwise, for the purpose of inquiring
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1 about or purchasing a nondeposit invest2 ment product;

3 ‘‘(C) the term ‘Federal securities law’ has

4 the meaning given to the term ‘securities laws’

5 in section 3(a)(47) of the Securities Exchange

6 Act of 1934;

7 ‘‘(D) the term ‘nondeposit investment

8 product’—

9 ‘‘(i) includes any investment product

10 that is not a deposit; and

11 ‘‘(ii) does not include—

12 ‘‘(I) any loan or other extension

13 of credit by an insured depository in14 stitution;

15 ‘‘(II) any letter of credit; or

16 ‘‘(III) any other instrument or

17 investment product specifically ex18 cluded from the definition of such

19 term by regulations prescribed jointly

20 by the Federal banking agencies after

21 consultation with the Securities and

22 Exchange Commission;

23 ‘‘(E) the term ‘nonpublic customer infor24 mation’—
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1 ‘‘(i) means information regarding any

2 person which has been derived from any

3 record of any insured depository institution

4 and pertains to the person’s relationship

5 with the institution, including the provision

6 or servicing of a credit card; and

7 ‘‘(ii) does not include information

8 about a person that could be obtained from

9 a credit reporting agency that is subject to

10 the restrictions of the Fair Credit Report11 ing Act by a third party that is not enter12 ing into a credit relationship with the per13 son, but that otherwise has a legitimate

14 business need for that information in con15 nection with a business transaction involv16 ing the person; and

17 ‘‘(F) the term ‘self-regulatory organization’

18 has the same meaning as in section 3(a)(26) of

19 the Securities Exchange Act of 1934.

20 ‘‘(2) MISREPRESENTATION OF GUARANTEES.—

21 It shall be unlawful for any insured depository insti22 tution sponsoring, selling, or soliciting the purchase

23 of any nondeposit investment product to represent or

24 imply in any manner whatsoever that such

25 nondeposit investment product—
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1 ‘‘(A) is guaranteed or approved by the

2 United States or any agency or officer thereof;

3 or

4 ‘‘(B) is insured under this Act.

5 ‘‘(3) CUSTOMER DISCLOSURE.—

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

7 institution shall, concurrently with the opening

8 of an investment account by a customer or with

9 the initial purchase of a nondeposit investment

10 product by a customer, prominently disclose, in

11 writing, to that customer—

12 ‘‘(i) that nondeposit investment prod13 ucts offered, recommended, sponsored, or

14 sold by the institution—

15 ‘‘(I) are not deposits;

16 ‘‘(II) are not insured under this

17 Act;

18 ‘‘(III) are not guaranteed by the

19 insured depository institution; and

20 ‘‘(IV) carry risk of a loss of prin21 cipal;

22 ‘‘(ii) the nature of the relationship be23 tween the insured depository institution

24 and the broker or dealer;
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1 ‘‘(iii) any fees that the customer will

2 or may incur in connection with the

3 nondeposit investment product;

4 ‘‘(iv) whether the broker or dealer

5 would receive any higher or special com6 pensation for the sale of certain types of

7 nondeposit investment products; and

8 ‘‘(v) any other information that the

9 Federal banking agencies jointly determine

10 to be appropriate.

11 ‘‘(B) CUSTOMER ACKNOWLEDGMENT OF

12 DISCLOSURE.—

13 ‘‘(i) IN GENERAL.—Concurrently with

14 the opening of an investment account by a

15 customer or with the initial purchase of a

16 nondeposit investment product by a cus17 tomer, an insured depository institution or

18 other person required to make disclosures

19 to the customer under subparagraph (A)

20 shall obtain from each such customer a

21 written acknowledgment of receipt of such

22 disclosures, including the date of receipt

23 and the name, address, account number,

24 and signature of the customer.
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1 ‘‘(ii) RECORDS OF CUSTOMER AC2 KNOWLEDGEMENT.—An insured depository

3 institution shall maintain appropriate

4 records of the written acknowledgement re5 quired by this subparagraph for an appro6 priate period, as determined by the Cor7 poration. Such record shall include the

8 date on which the acknowledgment was ob9 tained and the customer’s name and ad10 dress.

11 ‘‘(iii) DURATION OF ACKNOWLEDGE12 MENT.—Written acknowledgement shall

13 not be considered valid for purposes of this

14 subparagraph for a period of more than 5

15 years, beginning on the date on which it

16 was obtained.

17 ‘‘(C) PROHIBITION ON INCONSISTENT

18 ORAL REPRESENTATIONS.—No employee of an

19 insured depository institution shall make any

20 oral representation to a customer of an insured

21 depository institution that is contradictory or

22 otherwise inconsistent with the information re23 quired to be disclosed to the customer under

24 this paragraph.
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1 ‘‘(D) MODEL FORMS AND REGULATIONS.—

2 The Federal banking agencies, after consulta3 tion with the Securities and Exchange Commis4 sion, shall jointly issue appropriate regulations

5 incorporating the requirements of this para6 graph. Such regulations shall include a require7 ment for a model disclosure form solely for such

8 purpose to be used by all insured depository in9 stitutions incorporating the disclosures required

10 by this paragraph.

11 ‘‘(4) REFERRAL COMPENSATION.—A one-time

12 nominal referral fee may be paid by an insured de13 pository institution to any employee of that institu14 tion who refers a customer of that institution either

15 to a broker or dealer or to another employee of that

16 insured depository institution for services related to

17 the sale of a nondeposit investment product, if the

18 fee is not based upon whether or not the customer

19 referred makes a purchase from the broker, dealer,

20 or other employee.

21 ‘‘(5) PROHIBITION OF JOINT MARKETING AC22 TIVITIES.—No nondeposit investment product may

23 be offered, recommended, or sold by a person unaf24 filiated with an insured depository institution on the

25 premises of that institution as part of joint market-
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1 ing activities, unless the person marketing such

2 nondeposit investment product—

3 ‘‘(A) prominently discloses to its cus4 tomers, in writing, in addition to the disclosures

5 required in paragraph (3), that such person is

6 not an insured depository institution and is sep7 arate and distinct from the insured depository

8 institution with which it shares marketing ac9 tivities; and

10 ‘‘(B) otherwise complies with the require11 ments of this subsection.

12 ‘‘(6) LIMITATIONS ON ADVERTISING.—

13 ‘‘(A) MISLEADING ADVERTISING.—No in14 sured depository institution may employ any ad15 vertisement that would mislead or otherwise

16 cause a reasonable person to believe mistakenly

17 that an insured depository institution or the

18 Federal Government is responsible for the ac19 tivities of an affiliate of the institution, stands

20 behind the affiliate’s credit, guarantees any re21 turns on nondeposit investment products, or is

22 a source of payment of any obligation of or sold

23 by the affiliate.

24 ‘‘(B) NAMES, LETTERHEADS, AND

25 LOGOS.—In offering, recommending, sponsor-
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1 ing, or selling nondeposit investment products,

2 an insured depository institution shall use

3 names, letterheads, and logos that are suffi4 ciently different from the names, letterheads,

5 and logos of the institution so as to avoid the

6 possibility of confusion.

7 ‘‘(C) SEPARATION OF LITERATURE.—All

8 sales literature related to the marketing of

9 nondeposit investment products by an insured

10 depository institution shall be kept separate and

11 apart from, and not be commingled with, the

12 banking literature of that institution.

13 ‘‘(7) LIMITATIONS ON SOLICITATION.—The

14 place of solicitation or sale of nondeposit investment

15 products by an insured depository institution shall

16 be—

17 ‘‘(A) physically separated from the banking

18 activities of the institution; and

19 ‘‘(B) readily distinguishable by the public

20 as separate and distinct from that of the insti21 tution.

22 ‘‘(8) SALES STAFF REQUIREMENT.—Solicitation

23 for the purchase or sale of nondeposit investment

24 products by any insured depository institution may

25 only be conducted by a person—
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1 ‘‘(A) who—

2 ‘‘(i) is a registered broker or dealer or

3 a person affiliated with a registered broker

4 or dealer; or

5 ‘‘(ii) has passed a qualification exam6 ination that the appropriate Federal bank7 ing agency, in consultation with the Secu8 rities and Exchange Commission, deter9 mines to be comparable to those used by a

10 national security exchange registered under

11 section 6 of the Securities Exchange Act of

12 1934, or a national securities association

13 registered under section 15A of that Act,

14 for persons required to be registered with

15 the exchange or association; and

16 ‘‘(B) whose responsibilities are restricted

17 to such nondeposit investment products.

18 ‘‘(9) NO FAVORING OF CAPTIVE AGENTS.—No

19 insured depository institution may directly or indi20 rectly require, as a condition of providing any prod21 uct or service to any customer, or any renewal of

22 any contract for providing such product or service,

23 that the customer acquire, finance, negotiate, refi24 nance, or renegotiate any nondeposit investment

25 product through a named broker or dealer.
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1 ‘‘(10) RESTRICTIONS ON USE OF NONPUBLIC

2 CUSTOMER INFORMATION.—

3 ‘‘(A) IN GENERAL.—Except as provided in

4 subparagraph (B), no insured depository insti5 tution may use or disclose to any person any

6 nonpublic customer information for the purpose

7 of soliciting the purchase or sale of nondeposit

8 investment products.

9 ‘‘(B) EXCEPTION BASED ON DISCLO10 SURE.—An insured depository institution may

11 use or disclose nonpublic customer information

12 for the purpose of soliciting the purchase or

13 sale of nondeposit investment products if, be14 fore such use or disclosure—

15 ‘‘(i) the customer gives explicit written

16 consent to such use or disclosure; and

17 ‘‘(ii) such written consent is given

18 after the institution has provided the cus19 tomer with written disclosure that—

20 ‘‘(I) the information may be used

21 to target the customer for marketing

22 or advertising for nondeposit invest23 ment products;

24 ‘‘(II) such nondeposit investment

25 products are not guaranteed or ap-
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1 proved by the United States or any

2 agency thereof; and

3 ‘‘(III) such nondeposit invest4 ment products are not insured under

5 this Act.

6 ‘‘(C) RECORDS OF CUSTOMER CONSENT.—

7 An insured depository institution shall maintain

8 appropriate records of the written consent re9 quired by subparagraph (B) for an appropriate

10 period, as determined by the Corporation. Such

11 record shall include the date on which the con12 sent was signed and the customer’s name and

13 address.

14 ‘‘(D) DURATION OF CONSENT.—Written

15 consent shall not be considered valid for pur16 poses of this paragraph for a period of more

17 than 5 years, beginning on the date on which

18 it was obtained.

19 ‘‘(E) ADDITIONAL RESTRICTIONS.—The

20 Corporation may, by regulation or order, pre21 scribe additional restrictions and requirements

22 limiting the disclosure of nonpublic customer in23 formation, including information to be used in

24 an evaluation of the credit worthiness of an is25 suer or other customer of that insured deposi-
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1 tory institution and such additional restrictions

2 as may be necessary or appropriate to avoid

3 any significant risk to insured depository insti4 tutions, protect customers, and avoid conflicts

5 of interest or other abuses.

6 ‘‘(11) SCOPE OF APPLICATION.—

7 ‘‘(A) APPLICATION LIMITED TO RETAIL

8 ACTIVITIES.—The Federal banking agencies,

9 after consultation with the Securities and Ex10 change Commission, may waive the require11 ments of any provision of this subsection, other

12 than paragraph (10), with respect to any trans13 action otherwise subject to such provision be14 tween—

15 ‘‘(i) any insured depository institution

16 or any other person who is subject, directly

17 or indirectly, to the requirements of this

18 section; and

19 ‘‘(ii) any other insured depository in20 stitution, any registered broker or dealer,

21 any person who is, or meets the require22 ments for, an accredited investor, as such

23 term is defined in section 2(15)(i) of the

24 Securities Act of 1933, or any other cus25 tomer who the Federal banking agencies,
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1 after consultation with the Securities and

2 Exchange Commission, jointly determine,

3 on the basis of the financial sophistication

4 of the customer, does not need the protec5 tion afforded by the requirements to be

6 waived.

7 ‘‘(B) NO EFFECT ON OTHER AUTHOR8 ITY.—No provision of this subsection shall be

9 construed as limiting or otherwise affecting—

10 ‘‘(i) any authority of the Securities

11 and Exchange Commission, any self-regu12 latory organization, the Municipal Securi13 ties Rulemaking Board, or the Secretary of

14 the Treasury under any Federal securities

15 law;

16 ‘‘(ii) any authority of any State secu17 rities regulatory agency; or

18 ‘‘(iii) the applicability of any Federal

19 securities law, or any rule or regulation

20 prescribed by the Commission, any self21 regulatory organization, the Municipal Se22 curities Rulemaking Board, or the Sec23 retary of the Treasury pursuant to any

24 such law, to any person.
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1 ‘‘(12) ENFORCEMENT.—The provisions of this

2 subsection shall be enforced in accordance with sec3 tion 8.’’.

4 (b) REGULATIONS.—Not later than 1 year after the

5 date of enactment of this Act, after consultation with the

6 Securities and Exchange Commission, the appropriate

7 Federal banking agencies (as defined in section 3 of the

8 Federal Deposit Insurance Act) shall jointly promulgate

9 appropriate regulations to implement section 18(q) of the

10 Federal Deposit Insurance Act, as added by subsection (a)

11 of this section.

12 SEC. 3. REGULATION BY THE SECURITIES AND EXCHANGE

13 COMMISSION.

14 (a) SEC RULEMAKING.—Not later than 1 year after

15 the date of enactment of this Act, the Securities and Ex16 change Commission shall, after consultation with the Fed17 eral banking agencies (as defined in section 3 of the Fed18 eral Deposit Insurance Act), promulgate regulations

19 that—

20 (1) would afford customers of brokers and deal21 ers that affect transactions on behalf of insured de22 pository institutions and customers of affiliates of

23 insured depository institutions protections that are

24 substantially similar to section 18(q) of the Federal

25 Deposit Insurance Act (as added by section 2 of this
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1 Act) and the regulations promulgated thereunder;

2 and

3 (2) are consistent with the purposes of that sec4 tion 18(q) and the protection of investors.

5 (b) ENFORCEMENT.—The Commission shall have the

6 same authority to enforce rules or regulations promul7 gated under subsection (a) as it has to enforce the provi8 sions of the Securities Exchange Act of 1934.

9 SEC. 4. ENFORCEMENT COORDINATION.

10 The Federal banking agencies and the Securities and

11 Exchange Commission shall work together to develop com12 parable methods of securities enforcement and a process

13 for the interagency exchange of enforcement-related infor14 mation.

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