Despite significant changes in the regulatory environment over the past 23 years, the Interagency Statement on Retail Sales of Nondeposit Investment Products (“Interagency Statement”), issued on February 15, 1994, remains unchanged. With the recent implementation of the Department of Labor’s Fiduciary Rule, however, many banks have taken this as an opportunity to review and freshen up their nondeposit investment products (NDIP) written programs. In this article, we’ll give you a jump start by focusing on the regulatory requirements as they relate to the NDIP program, disclosure obligations, and setting and circumstances. Let’s get started!
As you may already know, you must implement and maintain a written NDIP program if your bank makes nondeposit investment products available on bank premises to retail consumers, either through an employee of the bank or through a third-party provider if the bank receives a benefit for the referral. Regulators expect your written program to contain the following provisions:
Program management. At a minimum, the written NDIP program must:
- Address the risks associated with the program.
- Contain a summary of policies and procedures.
- Outline the features of the program.
- Address the scope of activities of any third party involved.
- Contain procedures for monitoring compliance of third parties.
The scope and level of detail included in your written program should be reflective of your bank’s involvement in offering these products and services. The program should be updated and reviewed by the Board of Directors periodically; we suggest annually. If this is a new initiative for your bank, be sure to seek legal counsel and obtain Board approval prior to implementation.
Compliance procedures. Written procedures should ensure consistent compliance with applicable laws and regulations, as well as the provisions of the Interagency Statement. For each NDIP program policy or provision, there should be a corresponding procedure for monitoring compliance, a method for documenting monitoring results, and a schedule for providing these results to the Board or a committee of the Board.
Supervision of personnel involved in sales. Senior management should designate specific individuals to exercise supervisory responsibility over each activity outlined in the policies and procedures. Persons designated for this role should have the knowledge and training necessary to analyze all aspects of the NDIP program for potential patterns or practices that warrant further attention and the authority to take action, as needed.
Types of products sold. The breadth of financial products and services potentially available through a broker-dealer relationship is vast: annuities, mutual funds, publicly traded stocks, exchange traded funds, index-based products, variable life insurance, and the list goes on. In addition to conducting an initial review of the broker-dealer’s product selection process, be sure the broker-dealer informs you of any revisions made to this process, as well as additions to product offerings. The list of products offered through the broker-dealer is often referred to as the “selling agreement list.” If this is not a list regularly provided to you by the broker-dealer, implement procedures to periodically obtain and review the list to ensure the products available continue to be appropriate for your customers and their investment needs. Pay particular attention to the availability of investment products that may be more sophisticated and therefore more risky than appropriate for your customer base, and consider whether it may be appropriate to limit or restrict those product sales.
Designation of employees to sell investment products. With regard to personnel, the written NDIP program should:
- Specify responsibilities of those persons authorized to offer NDIPs to your customers.
- Specify responsibilities of personnel who are not authorized to offer NDIPs but may have contact with your retail customers concerning the NDIP sales program.
- Describe both appropriate and inappropriate referral activities.
- Establish training requirements.
- Describe compensation arrangements for each class of personnel.
Arrangements with third parties. Prior to implementing your NDIP program, conduct appropriate due diligence of the third party, including the broker/dealer and the individual registered representative(s). Look for red flags that may present reputation risk, such as recent regulatory attention, public complaints, or reportable events on the broker-dealer or registered representative’s FINRA (Financial Industry Regulatory Authority) BrokerCheck report. Once you choose the firm and registered representative that best fits the needs of your customer base, it’s time to establish a formal agreement. The third-party networking agreement should be in writing and approved by your Board of Directors. The Interagency Statement prescribes that, at a minimum, this agreement should:
- Describe the duties and responsibilities of each party, including a description of permissible activities by the third party on the bank’s premises, terms as to the use of the bank’s space, personnel, and equipment, and compensation arrangements for personnel of the bank and the third party.
- Specify that the third party will comply with all applicable laws and regulations and will act consistently with the provisions of the Interagency Statement and, in particular, with the provisions relating to customer disclosures.
- Authorize the bank to monitor the third party and periodically review and verify the third party’s compliance with the agreement.
- Authorize the bank and appropriate banking agency to have access to records of the third party as necessary or appropriate to evaluate compliance with the agreement.
- Require the third party to indemnify the bank for potential liability resulting from actions of the third party with regard to the NDIP sales program.
- Provide written employment contracts for personnel who are employees, or contract employees, of both the bank and the third party.
Whether you are establishing a new NDIP program or conducting a periodic review, be sure your third party agreement is up to date and satisfies the requirements listed above.
Because the potential for consumer confusion is substantial, recommending or selling NDIPs to retail customers should be done in a manner that clearly differentiates NDIPs from insured products. Where NDIPs are recommended or sold to retail customers, banks should ensure the customer is fully informed that the products are:
- NOT insured.
- NOT deposits or other obligations of the bank and are NOT guaranteed by the bank.
- Subject to investment risks, including possible loss of the principal invested.
At a minimum, these disclosures must be provided:
- Orally during any sales presentation.
- Orally when investment advice concerning NDIPs is provided.
- Orally and in writing at the time an investment account is opened to purchase these products.
- In advertisements and other promotional materials, as described later in this article.
Disclosure acknowledgment. At the time an account is opened for the purpose of purchasing any NDIP, the customer must sign a statement acknowledging the customer has received and understands the disclosure. This written acknowledgment must be retained in the customer’s file.
Advertisements, promotional materials, telemarketing. All advertisements and other promotional materials about NDIPs should conspicuously include at least the minimum disclosures listed above and in telemarketing contacts, these disclosures must be emphasized.
Setting and Circumstances
Because the mere fact that offering NDIPs on the premises of a depository bank may give the impression the products are FDIC-insured or are an obligation of the bank:
- All NDIP sales or recommendations that take place on the premises of the bank should be conducted in a location that is physically distinct from the area where retail deposits are taken, to the extent possible.
- Signage or other means should be used to distinguish the investment sales area from the retail deposit-taking area.
- Under no circumstances should tellers or other employees, while located in a routine deposit-taking area, make general or specific investment recommendations regarding NDIPs, qualify a customer as eligible to purchase such products, or accept orders for NDIPs, even if unsolicited.
Whether you are in the throes of implementing a new NDIP program, looking for a refresher on the basics, wanting to better understand your obligations under the new Fiduciary Rule, or anything in between, Wipfli has resources to assist you. Contact your Wipfli relationship manager for more information.