The Road to Retail Investments


A basic compliance framework for an investment product sales program

By Mary Thorson Wright

In addition to providing loans and FDIC-insured deposit accounts, some community banks have expanded their retail product offerings to nondeposit investment products, provided either directly or through an arrangement with a third-party brokerage firm. For FDIC-insured banks, selling non-FDIC-insured accounts is a double-edged sword, providing a vehicle for varied product offerings and revenue but also presenting some compliance challenges.

Generally, the best guidance on compliance for nondeposit investment product sales is the Interagency Statement on Retail Sales of NonDeposit Investment Products (interagency statement) issued in February 1994, and interpretations issued by the banking agencies in September 1995.

In general, the interagency statement applies when employees of the depository institution make retail recommendations or sales of investment products; when employees of a third party sell investment products on an institution’s premises; and when investment product referrals to a third party benefit a financial institution.
Here are compliance issues to consider when starting a retail investment program.

Compliance management. A community bank selling investment products should include those products in its compliance management program. A written policy statement, adopted and reviewed periodically by its board of directors, should address the risks associated with selling these products. It also should summarize the features of the institution’s compliance program designed to mitigate risk and to comply with the Interagency Statement.

The scope of investment activities of any third party should be specifically described, including procedures to monitor the third party’s compliance with the Interagency Statement. Third-party arrangements should be managed through the bank’s third-party vendor management compliance program, including before entering into a third-party arrangement.

Disclosures. Conspicuous and easy-to-comprehend disclosures about the nature of investment products and their risk must be provided to customers. Disclosures must delineate investment products from FDIC-insured accounts. The timing and content of disclosures are described in the Interagency Statement.

Setting and circumstances. When investment products are sold or recommended on bank premises, the setting and circumstances—physical location, signage, product information—must be distinct from the area where retail deposits are taken.

Qualifications and training. Personnel who sell or provide advice about investment products must be adequately trained and licensed, which includes continuing education requirements. The backgrounds of employees selling investment products should be investigated, including for past regulatory disciplinary actions.

Suitability and sales practices. Employees selling investment products must be subject to effective management and compliance reviews. Investment product recommendations must be suitable for the customer and be based on the customer’s financial and tax status, investment objectives and other relevant information.

Compensation. Employees may receive a one-time nominal fixed fee for each customer referral for investment products. A referral fee cannot be based on whether the referral resulted in a sale or transaction. Those who sell investment products may receive incentive compensation such as commissions; however, such compensation should be monitored for appropriateness.

Mary Thorson Wright, a former Federal Reserve managing examiner, is a financial writer in Virginia.