All issuances from the bank regulatory agencies stress the responsibility of bank management to develop and maintain a compliance program. Involvement of senior officials of the bank, including the CEO and the board of directors, is essential. Also essential is the requirement that there be a program and that the program be managed. The NDIP compliance program should be designed to meet three goals. These three goals reveal the agencies' primary concerns with NDIP sales.
To meet these goals, the program should contain specific elements. These elements are classic to compliance programs. In fact, they are the generic building blocks of any compliance program. Here, however, the driving force is agency concern for avoiding market confusion between FDIC insured deposit products and non-deposit investment products.
First, and most important, is board oversight of the program and the products. There should be a board resolution and policy statement that outlines the program and identifies and addresses the risks of the program. These risks should be tailored to the bank and identify ways in which the bank will manage that risk. The policy should take into account any special features of the bank and its market.
In addition to dealing with market and risk issues specific to the bank, the board's policy statement should specifically address the elements in the federal agencies' 1994 Interagency Statement. In particular, the bank's policy statement should establish the program's procedures and controls.
To the extent that they are relevant, the board's statement should also address aspects of the program such as third party relationships. When the bank uses a third party vendor, the bank and the Board are responsible for the third party's compliance with all laws and regulations, including the Interagency Statement.
No compliance program can exist without compliance procedures. This means developing procedures for product sales staff and others who may refer or be asked questions. The procedures should provide for how the product will be sold, including when and how - and how often - disclosures should be given to the customer.
The procedures should also provide clear guidance for any staff that may be in a position to refer a customer. Give clear instructions on how to make a referral. Also, clearly advise staff of what not to say. Avoiding any customer confusion about the deposit insurance and risk status of products may be as important as any other element of your program.
The program should also place clear responsibilities on staff for compliance with the program. In particular, those responsible for sales should clearly have compliance requirements written into their job descriptions as well as into the procedures.
Supervision by Management
Personnel involved in sales should be supervised by senior management. When the policy statement puts this forward, it does not mean that the supervision should only be nominal. The agencies expect that this supervision should be active, regular, and hands-on. One of the reasons for senior level supervision is to ensure that the bank is as actively managing the non-deposit products as the insured deposits and loan products. This concern is driven by the significance of the potential liability.
Types of products
The board and senior management should give careful attention to the types of products the bank will sell. Traditional bank products offer the safety and security of deposit insurance. Selling alternative products such as mutual funds brings the seller of the products into the arena of such concerns as suitability of the product for the customer.
Whether or not the product is suitable for the customer may become an important issue for regulation, consumer complaints, and litigation. Thus, at the beginning of the process, the bank and its board should give care to the selection of products and vendors. This consideration should include consideration of the suitability of products for the bank's market and customers. This selection actually lays the foundation of the suitability question. The degree of care taken by the bank at this stage can determine the bank's future liability as well as the success of the products.
Permissible use of customer information
Using the bank's information about its customers is at the heart of a heated, territorial debate between the independent brokers who are threatened by the belief that this information would be advantageous for the bank's sales program, and the banks themselves and their vendors who also believe the information would be useful.
At present, the regulatory agencies support the use of such information. Any type of abuse, however, would instigate a movement to make this information inaccessible to the program. Thus, the bank's written policy and program should clearly establish how information can be used, how it can be obtained, who may obtain it, and who may provide it. There should be no confusion on this.
For example, the policy could provide that each month, deposit operations will provide a list of customers who own certificates of deposit in excess of $4,999 that will mature in the next 60 days. The sales program can then use this information to contact these customers and offer information about non-deposit investment products. Should the bank choose to do this, the disclosures about non-deposit investment products should be made clearly and often.
Designation of employees to sell investment products
The regulatory agencies also recommend that the bank's policy and program specify which employees are designated to sell non-deposit investment products. The written program should describe or name the personnel that will sell products. The program should also specify the roles, including any limitations, of other bank employees in referring customers, scheduling appointments, or providing information to customers. At every opportunity, the bank should make employee roles and responsibility as clear as possible.
In addition to specifying roles, the policy should establish clear educational and training requirements. The policy should give attention to the education and licensing of the broker/dealers whether employed by the bank or by a third-party vendor. The policy should also establish clear continuing education requirements. Needless to say, this should also be reflected in the bank's budget!
The policy should make clear the required disclosures and specify when those disclosures should be given to customers. Appropriate times include when beginning a discussion with a customer, when providing a customer with information or answering questions about the products, in all advertisements, and before closing the sale. All bank staff, not only the product sales staff, should be familiar with these disclosure requirements.
Goal #1: Compliance
First, the bank's management must ensure that the bank's NDIP activity adheres to all laws, regulations, and the 1994 Interagency Policy Statement. The laws and regulations include all securities acts and regulations issued by the SEC that are relevant to the bank's programs. In addition, bank agency regulations may be relevant, depending on the structure of the bank's program. As with any compliance program, success here depends on management commitment, access to resources, clearly assigned roles and responsibilities, and systems for monitoring and controls.
Goal #2: Safety and Soundness
The foremost concern of the board should be the safety and soundness of the bank. All NDIP program goals and strategies should be set with safety and soundness in mind. The programs should enhance the bank's profitability and support its soundness, not threaten it. Fundamentally, regulatory agencies are primarily concerned about safety and soundness. The largest threat of the sale of NDIP products to safety and soundness comes from potential liability to customers. In spite of the newness of the products, the industry has already faced several large lawsuits and class actions.
Goal #3: Knowledgeable Consumers through Disclosures
Treated in this program as a separate issue from compliance, the information given to the consumer about the product is critical. Good disclosures are the basis for good customer service, and - if needed - a good defense. The degree to which the consumer understands the transaction and the related risks can directly affect the bank's bottom line. That's why the regulatory agencies insist that these disclosures must be hammered home at every opportunity.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 16 & 17, 12/97
First published on 12/01/1997