I

104TH CONGRESS

1ST SESSION H. R. 727

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

JANUARY 30, 1995

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

which was referred to the Committee on Banking and Financial Services

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. 45. REGULATION OF RETAIL SALES OF NONDEPOSIT

7 INVESTMENT PRODUCTS BY INSURED DEPOS8 ITORY INSTITUTIONS.

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

10 following definitions shall apply:

11 ‘‘(1) BANKING OFFICE.—The term ‘banking of12 fice’ means any office, or any part of any office, of

13 an insured depository institution that is commonly

14 accessible to the general public for the purpose of

15 accepting or withdrawing deposits.

16 ‘‘(2) NONDEPOSIT INVESTMENT PRODUCT.—

17 The term ‘nondeposit investment product’—

18 ‘‘(A) means any investment product which

19 is not a deposit;

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

21 investment company; and

22 ‘‘(C) does not include—

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

24 credit by an insured depository institution;

25 ‘‘(ii) any letter of credit; or
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1 ‘‘(iii) any other instrument or invest2 ment product specifically excluded from

3 the definition of such term by regulations

4 prescribed jointly by the Federal banking

5 agencies.

6 ‘‘(b) SCOPE OF APPLICATION.—

7 ‘‘(1) APPLICATION LIMITED TO RETAIL ACTIVI8 TIES.—The provisions of this section shall not apply

9 with respect to any transaction (which is otherwise

10 subject to the requirements of this section)

11 between—

12 ‘‘(A) any insured depository institution,

13 any affiliate of such institution, or any other

14 person who is subject, directly or indirectly, to

15 the requirements of this section; and

16 ‘‘(B) any other insured depository institu17 tion, any affiliate of another insured depository

18 institution, any broker or dealer registered

19 under the Securities Exchange Act of 1934, any

20 person who is, or meets the requirements for,

21 an accredited investor, as such term is defined

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

23 1933, or any other customer who the appro24 priate Federal banking agency determines, on

25 the basis of the financial sophistication of the
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1 customer, does not need the protection afforded

2 by this section.

3 ‘‘(2) NO EFFECT ON OTHER AUTHORITY.—

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

5 section shall be construed as limiting or other6 wise affecting—

7 ‘‘(i) any authority of the Securities

8 and Exchange Commission, any self-regu9 latory organization, the Municipal Securi10 ties Rulemaking Board, or the Secretary of

11 the Treasury under any Federal securities

12 law; or

13 ‘‘(ii) the applicability of any Federal

14 securities law, or any rule or regulation

15 prescribed by the Commission, any self16 regulatory organization, the Municipal Se17 curities Rulemaking Board, or the Sec18 retary of the Treasury pursuant to any

19 such law, to any person.

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

21 paragraph, the following definitions shall apply:

22 ‘‘(i) FEDERAL SECURITIES LAW.—The

23 term ‘Federal securities law’ has the mean24 ing given to the term ‘securities laws’ in
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1 section 3(a)(47) of the Securities Ex2 change Act of 1934.

3 ‘‘(ii) SELF-REGULATORY ORGANIZA4 TION.—The term ‘self-regulatory organiza5 tion’ has the meaning given to such term

6 in section 3(a)(26) of the Securities Ex7 change Act of 1934.

8 ‘‘(c) PROHIBITION ON MISLEADING AND DECEPTIVE

9 PRACTICES.—

10 ‘‘(1) IN GENERAL.—An insured depository in11 stitution may not permit any person to engage in

12 any practice, or employ any advertising, at any of13 fice of, or on behalf of, the institution which could

14 mislead any person or otherwise cause a reasonable

15 person to reach an erroneous belief with respect to—

16 ‘‘(A) the uninsured nature of any

17 nondeposit investment product sold, or offered

18 for sale, by—

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

20 or any affiliate of the institution; or

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

22 or on behalf of, the institution; or

23 ‘‘(B) the investment risk associated with

24 any such product.
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1 ‘‘(2) CONTENTS OF REGULATIONS.—The Fed2 eral banking agencies shall jointly prescribe rules of

3 fair practice governing retail sales, including phone

4 sales and direct mail solicitations, of nondeposit in5 vestment products by, on behalf of, or in any office

6 of, any insured depository institution (in any capac7 ity) and any affiliate of such institution.

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

9 regulations pursuant to paragraph (2), the Federal

10 banking agencies shall take into account the Rules

11 of Fair Practice of the National Association of Secu12 rity Dealers and any other applicable rules or regu13 lations the agencies determine to be appropriate.

14 ‘‘(d) DISCLOSURE REQUIREMENTS.—

15 ‘‘(1) WRITTEN DISCLOSURES.—An insured de16 pository institution shall require any person who

17 sells or offers for sale any nondeposit investment

18 product in any office of, or on behalf of, the institu19 tion to disclose, in writing, to any person who seeks

20 to purchase, or seeks an opinion or investment ad21 vice about, any such product the following informa22 tion:

23 ‘‘(A) The nondeposit investment product is

24 not insured by the Federal Deposit Insurance
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1 Corporation, the United States Government, or

2 the institution.

3 ‘‘(B) The product poses some investment

4 risk and the risk may involve the loss of prin5 cipal such that when the product is sold by the

6 investor, it may be worth less than when pur7 chased by the investor.

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

9 between the insured depository institution and

10 any other person which originated the product

11 or is otherwise directly or indirectly involved

12 with underwriting, selling, or distributing the

13 product.

14 ‘‘(D) If the nondeposit investment product

15 consists of shares issued by a registered invest16 ment company, the relationship between the in17 sured depository institution, or any affiliate of

18 the institution, and the investment company.

19 ‘‘(2) CUSTOMER’S SIGNED STATEMENT RELAT20 ING TO INITIAL PURCHASE OF NONDEPOSIT INVEST21 MENT PRODUCTS.—

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

23 institution shall require any person selling a

24 nondeposit investment product at any office of,

25 or on behalf of, the institution to obtain, at the
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1 time of the initial purchase by any person of

2 such product, a separate statement, signed and

3 dated by such person, which contains the dec4 laration that the purchaser has received, read,

5 and understood the disclosures required under

6 paragraph (1) with respect to such investment

7 product.

8 ‘‘(B) FORMAT OF DECLARATION.—The

9 declaration required under subparagraph (A)

10 shall be in a conspicuous and prominent loca11 tion on a sheet of paper which is separate from

12 a written application or any other document or

13 paper which such person signs or obtains in

14 connection with the initial purchase of a

15 nondeposit investment product.

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

17 The declaration required to be obtained under

18 subparagraph (A) from any person shall be ob19 tained for the initial purchase of each type of

20 nondeposit investment product purchased by

21 the person before each such transaction is final.

22 ‘‘(3) DISCLOSURES IN THE CASE OF SUBSE23 QUENT PURCHASES THROUGH ELECTRONIC OR

24 TELEPHONE TRANSFERS.—In the case of a purchase

25 (other than an initial purchase) by any person of a
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1 nondeposit investment product through, or in con2 junction with, an electronic funds transfer (as de3 fined in section 903(6) of the Electronic Fund

4 Transfer Act), a visual or oral notice may be pro5 vided (through the device used by the purchaser to

6 carry out such transfer), in lieu of the written disclo7 sure required under paragraph (1), reminding the

8 purchaser that the nondeposit investment product is

9 not a deposit which is insured by the Federal De10 posit Insurance Corporation, the United States Gov11 ernment, or the institution and poses some invest12 ment risk.

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

14 agencies shall jointly prescribe regulations establish15 ing model forms which meet or exceed the minimum

16 requirements of this subsection.

17 ‘‘(5) ADVERTISING AND PROMOTIONAL MATE18 RIAL.—Any advertisement, solicitation, or pro19 motional or sales material which relates to any

20 nondeposit investment product which is sold, or of21 fered for sale, at any office of, or on behalf of, an

22 insured depository institution (including any solicita23 tion contained in any periodic statement issued by

24 the institution), and any sale confirmation notice or

25 periodic statement issued in connection with any
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1 such product, shall contain the disclosures required

2 under paragraph (1).

3 ‘‘(e) LOCATION REQUIREMENTS.—

4 ‘‘(1) SALE OF PRODUCTS PROHIBITED IN AREA

5 WHERE DEPOSITS ARE ACCEPTED.—

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

7 institution may permit any part of any banking

8 office of the institution to be used for selling or

9 offering for sale, or for providing any opinion or

10 investment advice with respect to, any

11 nondeposit investment product.

12 ‘‘(B) PHYSICALLY SEGREGATED AREA.—

13 The area in which any nondeposit investment

14 product is sold or offered for sale, or any opin15 ion or investment advice with respect to such

16 product is provided, shall not be treated, for

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

18 banking office of an insured depository institu19 tion if such area is physically segregated from

20 the part of the office where deposits are accept21 ed or withdrawn.

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

23 An insured depository institution shall post, in a

24 conspicuous place in that part of any office of the
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1 institution in which any nondeposit investment prod2 uct is sold or offered for sale, a notice that—

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

4 the sale of nondeposit investment products

5 which are not insured by the Federal Deposit

6 Insurance Corporation, the United States Gov7 ernment, or the institution; and

8 ‘‘(B) deposits are not accepted at that lo9 cation.

10 ‘‘(f) EMPLOYEE SALES, TRAINING, AND COMPENSA11 TION.—

12 ‘‘(1) CERTAIN PERSONS PROHIBITED FROM

13 SELLING NONDEPOSIT INVESTMENT PRODUCTS.—An

14 insured depository institution may not permit any

15 person who accepts deposits from the public at any

16 office of, or on behalf of, an insured depository insti17 tution to sell or offer to sell, or offer an opinion or

18 investment advice on, any nondeposit investment

19 product.

20 ‘‘(2) REFERRAL.—Notwithstanding paragraph

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

22 at any office of, or on behalf of, an insured deposi23 tory institution may refer a customer who seeks to

24 purchase, or seeks an opinion or investment advice

25 on, any nondeposit investment product to a person,
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1 or the phone number of a person, who sells or pro2 vides opinions or investment advice on such product

3 only if—

4 ‘‘(A) the customer explicitly requests such

5 referral; and

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

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

8 ‘‘(ii) discloses to the customer that

9 such product is not insured by the institu10 tion, the Federal Deposit Insurance Cor11 poration, or the United States Govern12 ment, or the institution; and

13 ‘‘(iii) does not receive any compensa14 tion for the referral.

15 ‘‘(3) QUALIFICATION REQUIREMENTS.—

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

17 institution may permit any person to sell or

18 offer for sale, or provide an opinion or invest19 ment advice about, any nondeposit investment

20 product in any part of any office of the institu21 tion, or on behalf of the institution, unless such

22 person—

23 ‘‘(i) is registered with the Securities

24 and Exchange Commission as a broker or
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1 dealer, as a representative of a broker or

2 dealer, or as an investment adviser; or

3 ‘‘(ii) meets qualification and training

4 requirements which the Federal banking

5 agencies jointly determine are equivalent to

6 the training and qualification requirements

7 applicable to a person who is registered

8 with the Commission as a broker or dealer,

9 as a representative of a broker or dealer,

10 or as an investment adviser, as the case

11 may be.

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

13 training required under subparagraph (A)(ii)

14 shall include training in making an accurate

15 judgment about the suitability of a particular

16 nondeposit investment product for a prospective

17 customer.

18 ‘‘(4) COMPENSATION STANDARDS.—The Fed19 eral banking agencies shall prescribe regulations es20 tablishing minimum requirements for insured deposi21 tory institution compensation programs that are de22 signed to ensure that the programs do not operate

23 as, and do not have the effect of providing, an incen24 tive for the sale of nondeposit investment products
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1 to any customer in lieu of a more suitable invest2 ment option for such customer.

3 ‘‘(g) USE OF NAMES OF DEPOSITORY INSTITU4 TIONS.—

5 ‘‘(1) IN GENERAL.—No insured depository in6 stitution, and no affiliate of any insured depository

7 institution, may use or permit any other person to

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

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

10 or a variation of, the name, title, or logo of such in11 stitution in connection with—

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

13 for which the institution or affiliate acts as in14 vestment adviser; or

15 ‘‘(B) any nondeposit investment product—

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

17 institution or affiliate or by any other per18 son at any office of, or on behalf of, the in19 stitution; or

20 ‘‘(ii) with respect to which the institu21 tion, affiliate, or other person provides an

22 opinion or investment advice.

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

24 period beginning on the date of the enactment of the

25 Depository Institution Retail Investment Sales and
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1 Disclosure Act, paragraph (1) shall not apply to the

2 use of the name, title, or logo of an insured deposi3 tory institution, or of any word or design which is

4 the same as or similar to, or a variation of, the

5 name, title, or logo of such institution, in a manner

6 otherwise prohibited by paragraph (1) if such use

7 began before such date of enactment.

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

9 WHICH ARE NOT CONFUSING OR DECEPTIVE.—Not10 withstanding paragraph (1) or (2), if the use of the

11 name, title, or logo of an insured depository institu12 tion, or of a word or design which is the same as

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

14 logo of such institution, in a manner otherwise pro15 hibited by paragraph (1) began before the date of

16 the enactment of the Depository Institution Retail

17 Investment Sales and Disclosure Act, the appro18 priate Federal banking agency may permit such use

19 to continue after the end of the 6-month period re20 ferred to in paragraph (2) if the agency determines,

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

22 is unlikely to mislead any person or otherwise cause

23 a reasonable person to reach an erroneous belief

24 with respect to—
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1 ‘‘(A) the uninsured nature of any

2 nondeposit investment product sold, or offered

3 for sale, by—

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

5 or any affiliate of the institution; or

6 ‘‘(ii) any other person in any part of

7 any office of the institution; or

8 ‘‘(B) the investment risk associated with

9 any such instrument or product.

10 ‘‘(h) REQUIREMENTS RELATING TO CONFIDENTIAL

11 CUSTOMER INFORMATION.—

12 ‘‘(1) DISCLOSURES OF CONFIDENTIAL CUS13 TOMER INFORMATION PROHIBITED.—

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

15 institution may disclose, directly or indirectly,

16 any confidential customer information to any

17 person, including any affiliate of such institu18 tion, without the prior written consent of the

19 customer.

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

21 Whenever any insured depository institution ob22 tains the prior written consent of a customer

23 for purposes of subparagraph (A), the affiliate

24 shall—
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1 ‘‘(i) obtain an acknowledgment of

2 such consent by the customer, including

3 the date the consent was acknowledged

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

5 applicable account number;

6 ‘‘(ii) inform the customer that the

7 consent (and the disclosure of the con8 fidential information) may not be required

9 as a condition for the performance of serv10 ices for the customer; and

11 ‘‘(iii) maintain records of compliance

12 with clauses (i) and (ii).

13 ‘‘(C) CUSTOMER DEFINED.—

14 ‘‘(i) IN GENERAL.—For purposes of

15 this subparagraph, the term ‘customer’

16 means any person who, after the date of

17 enactment of the Depository Institution

18 Retail Investment Sales and Disclosure

19 Act, establishes a deposit, trust, or credit

20 relationship with an insured depository in21 stitution.

22 ‘‘(ii) TREATMENT OF CERTAIN DEPOS23 ITS.—Any renewal of an account in an in24 sured depository institution and any roll25 over of a deposit in any such account shall
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1 be treated as the establishment of a new

2 deposit relationship for purposes of clause

3 (i).

4 ‘‘(D) TREATMENT OF SEPARATELY IDEN5 TIFIABLE DEPARTMENT OR DIVISION.—For

6 purposes of this paragraph, the term ‘affiliate’

7 includes a separately identifiable department or

8 division of an insured depository institution

9 that is registered as an investment adviser pur10 suant to the Investment Advisers Act of 1940.

11 ‘‘(2) CONFIDENTIAL CUSTOMER INFORMATION

12 DEFINED.—

13 ‘‘(A) IN GENERAL.—For purposes of para14 graph (1), the term ‘confidential customer in15 formation’ means financial information regard16 ing any specific individual which has been de17 rived from any record of any insured depository

18 institution and pertains to the individual’s rela19 tionship with the institution.

20 ‘‘(B) CERTAIN INFORMATION NOT IN21 CLUDED IN DEFINITION.—Notwithstanding any

22 provision of paragraph (1), the term ‘confiden23 tial customer information’ shall not include—

24 ‘‘(i) any information obtainable from

25 an unaffiliated credit bureau or similar en-
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1 tity or information obtainable in the ordi2 nary course of business from any other un3 affiliated entity;

4 ‘‘(ii) any information provided to any

5 credit bureau or similar entity in the ordi6 nary course of business;

7 ‘‘(iii) any information provided—

8 ‘‘(I) to any appropriate Federal

9 regulatory agency; or

10 ‘‘(II) in accordance with the

11 Right to Financial Privacy Act of

12 1978 to any Government authority (as

13 defined in section 1101(3) of such

14 Act); and

15 ‘‘(iv) financial information the use of

16 which (by an insured depository institu17 tion, any affiliate of such institution, or

18 any agent of or contractor with such insti19 tution or affiliate) is limited to the per20 formance of—

21 ‘‘(I) any function which is nec22 essary to maintain a customer’s exist23 ing deposit, trust, or credit account

24 with the institution, including the col25 lection of any amount due the institu-
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1 tion by the customer with respect to

2 any such account; or

3 ‘‘(II) due diligence evaluations in

4 connection with the purchase or sale

5 of loan assets or servicing rights.

6 ‘‘(3) DISCLOSURE OF ADDITIONAL CUSTOMER

7 INFORMATION.—In addition to any requirement or

8 limitation contained in this section, the appropriate

9 Federal banking agency may prescribe regulations

10 limiting disclosures of nonpublic customer informa11 tion from any insured depository institution to any

12 affiliate of such institution, including an evaluation

13 of the creditworthiness of an issuer or other cus14 tomer of that insured depository institution or any

15 affiliate of such institution.

16 ‘‘(i) COMPLIANCE REQUIREMENT.—

17 ‘‘(1) IN GENERAL.—In conducting any exam18 ination of an insured depository institution, the ap19 propriate Federal banking agency shall include an

20 examination of the institution’s record of compliance

21 with the provisions of this section and the institu22 tion’s procedures for ensuring such compliance.

23 ‘‘(2) PROCEDURES.—An insured depository in24 stitution which permits any person who is not an of25 ficer or employee of the institution to sell or offer
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1 for sale, or provide an opinion or investment advice

2 on, nondeposit investment products on behalf of the

3 institution or in any part of any office of the institu4 tion shall establish procedures to ensure that the re5 quirements of this section are met by such person.

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

7 that the Federal banking agencies should conduct

8 testing of insured depository institution practices

9 with regard to selling, and providing opinions and

10 investment advice on, nondeposit investment prod11 ucts using testers who, without an intent to pur12 chase such products, pose as prospective purchasers

13 of such products for the purpose of collecting evi14 dence of violations of this section and regulations

15 prescribed under this section.’’.

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