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Compliance Laws and Regulations > Retail Investment Sales > Flashcards

Retail Investment Sales Flashcards

1
Q

What are retail investment sales?

A

Retail recommendations or sales of securities by, on behalf of, or on the premises of FDIC supervised institutions.

“Retail” in this context means securities recommendations or sales activities which are conducted separately from a bank’s trust or fiduciary activities. Bank trust and fiduciary activities are viewed as non-retail. RMS Trust Examination staff is responsible for the examination of these types of activities. Compliance examiners are responsible for reviewing retail investment sales activities regardless of where a bank conducts them, even if they occur within the same division or department where a bank conducts trust operations. In such situations, coordination with RMS Trust examiners is encouraged to ensure that activities receive the appropriate review.

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2
Q

What are securities?

A

Generally, securities are financial instruments that grant an ownership position or the right to purchase one. They are not insured by the FDIC. Moreover, one of their most significant features is investment risk, i.e., the risk that purchasers may lose part or all of their invested principal. Securities include individual stocks and bonds, mutual funds, self-directed individual retirement accounts (IRA) that invest in securities, and annuities.

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3
Q

Does the definition of securities include IRA and Keogh accounts offered outside the bank’s Trust department?

A

Yes, securities includes IRA and Keogh accounts offered outside of a bank’s Trust Department, when a bank offers self-directed custodial accounts that are established by individuals for their own benefit. When customers use such accounts to invest in securities sold by the bank or pursuant to a third party arrangement with the bank, they have engaged in a retail securities sales activity that should be reviewed by compliance examiners under these procedures.

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4
Q

Is the sale of annuities an insurance or investment activity?

A

The sale of annuities is supervised as both an insurance and an investment activity. Consequently, banks that offer these products should be examined under both these procedures and the Compliance Examination Procedures and Supervisory Guidance for Retail Insurance Sales.

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5
Q

What are some risks associated with retail investment sales? (3)

A
  • Potential to confuse customers
  • expose bank’s to contingent liabilities
  • damage bank reputation
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6
Q

What is a broker dealer?

A

A party that recommends or sells securities and is registered with the SEC as broker dealers.

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7
Q

When is a bank exempt from registering as a broker dealer with the SEC? (11)

A

A bank is exempt from registration as a broker when it sells securities as part of:
• third party arrangements conducted pursuant to written agreements;
• certain stock purchase plans;
• sweep accounts;
• affiliate transactions;
• private securities offerings;
• safekeeping and custody activities;
• transactions defined as permissible under GLBA;
• banking products specifically identified by GLBA;
• municipal securities;
• a de minimis number of transactions, i.e., less than 500 per year; or
• trust and fiduciary activities.

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8
Q

In order to avoid registering as a broker dealer with the SEC, what must bank’s do?

A

They may either register with the SEC as broker dealers or confine their programs to a list of activities exempt from registration.

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9
Q

True or false:

Examiners are required to assess bank compliance with exemptions to Broker Dealer registration.

A

False, the FDIC will do so once the SEC defines the scope of registration exemptions, and the SEC has yet to do so.

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10
Q

Who is subject to reviewing broker dealers and what is the FDICs role?

A

A bank, an affiliate of a bank, or a third party vendor which is registered with the SEC as a broker-dealer is subject to regulation by the SEC and securities self-regulatory organizations such as the NASD. As a result, these examination procedures do not attempt to evaluate compliance with SEC or NASD rules or regulations. However, compliance examiners should confirm that registered broker dealers employ properly licensed sales representatives.

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11
Q

What documentation should examiners consider when reviewing retail security sales? (6)

A
  • agreements with third parties
  • sales activity volume and financial reports
  • standard disclosures and acknowledgement forms
  • records that document qualifications of sales personnel
  • proprietary product management reports
  • other documentation related to retail securities sales
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12
Q

What does the interagency statement on retail sales of NDIP apply to?

Does it apply to Trust activities?

A

Applies to all retail securities activities transacted with consumer customers of an insured depository institution, regardless of whether the institution offers securities directly or through an arrangement with a third party. Moreover, the Interagency Statement applies to a dual employee of the bank and a third party when the employee effects retail securities transactions.

The Interagency Statement does not apply to trust activities. When trust powers are exercised, transactions should occur in segregated non-retail departments.

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13
Q

The interagency NDIP statement provides guidance on what?

A

Provides for specific actions banks should take with regard to program management, disclosures, sales setting, personnel qualifications, suitability, and compensation to effectively manage its securities sales programs and protect securities customers.

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14
Q

What does FDIC part 344, Recordkeeping and Confirmation Requirements for Securities Transactions apply to?

exceptions (5)

A

• Applies to any retail securities transactions effected by banks for consumer or commercial customers, with the following exceptions:

° Transactions Effected by Registered Broker/Dealers:
This regulation in its entirety does not apply to
transactions in which: (1) the broker/dealer is fully
disclosed to the bank customer, and (2) the bank
customer has a direct contractual agreement with the
broker/dealer. This broad exemption extends to
arrangements which involve a dual employee of the
bank and broker/dealer, when the employee is acting
as an employee of, and subject to the supervision of,
the registered broker dealer.

° Municipal Securities: This regulation in its entirety
does not apply to municipal securities transactions
effected at a bank registered with the SEC as a
municipal securities dealer.

° Foreign Branches: This regulation in its entirety
does not apply to transactions at foreign branches of
a bank.

° Small Number of Transactions: Certain recordkeeping and securities trading policies and procedures of the regulation do not apply to a bank effecting an average of fewer than 500 transactions (excluding government securities transactions) per year. The average is to be determined using the prior three calendar year period.

° Government Securities: The settlement and personal securities trading requirements of the regulation do
not apply to banks conducting transactions in government securities; and the recordkeeping requirements do not apply to banks effecting fewer than 500 government securities transactions per year.

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15
Q

What does FDIC Part 344, Recordkeeping and Confirmation

Requirements for Securities Transactions, require?

A

• Requires banks to provide customers with written
confirmation notices and to maintain appropriate records
and controls with respect to retail securities transactions
they effect.

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16
Q

What does treasury Regulations Part 403.5(d), Custody of
Securities Held by Financial Institutions that are
Government Securities Brokers and Dealers, apply to?

A

Applies to any bank that retains custody of government
securities that are part of a retail repurchase agreement
between the bank and its consumer or commercial
customers.

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17
Q

What does treasury Regulations Part 403.5(d), Custody of
Securities Held by Financial Institutions that are
Government Securities Brokers and Dealers require?

A

• Requires banks to provide customer disclosures,
customer transaction confirmation notices, and maintain
procedures pertaining to possession and control of
government securities.

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18
Q

What does treasury Regulations Part 450, Custodial Holdings of Government Securities by Depository Institutions apply to?

A

• Applies to any bank that retains possession of
government securities sold under a repurchase agreement
with consumer or commercial customers, or banks that
hold customer government securities as custodian or in
safekeeping.

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19
Q

What does treasury Regulations Part 450, Custodial Holdings of Government Securities by Depository Institutions require? (3)

A

• Requires banks to issue confirmation or safekeeping receipts for government securities held for customers,

  • properly segregate the securities, and
  • maintain appropriate controls and records for those securities.
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20
Q

What is an annuity?

A

“Annuities” are contracts that guarantee income (typically
for an individual’s lifetime) in exchange for a lump sum or
periodic payment. The terms are usually based upon the
individual’s expected lifetime and anticipated market
conditions. A variable annuity guarantees payments, but does not guarantee the payment amounts. Variable annuities are securities, contain investment risk, and investors select level of investment risk.

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21
Q

What are bank securities representatives?

A

“Bank Securities Representatives” are bank employees
who solicit, recommend, and effect investment transactions
for retail customers within an insured depository institution’s
direct investment sales program. Dual and third-party
employees are not bank securities representatives.

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22
Q

What are brokers?

A

“Brokers” charge a fee or commission for executing
customer transactions, or for providing services (for
example, investment advice).

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23
Q

What are discount brokers?

A

“Discount Brokers” simply execute transactions and
maintain customer accounts in exchange for fees or
commissions, but do not provide investment advice. All
discount brokerage transactions are unsolicited.

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24
Q

What are dual employees?

A

“Dual Employees” are employed by both the bank and a

third-party.

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25
Q

What are Full service brokers?

A

“Full-service Brokers” provide complete investment
services, including investment advice, in exchange for fees
or commissions.

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26
Q

What are Hybrid accounts?

A

“Hybrid Accounts” which include sweep accounts,

combine elements of insured deposits and investments.

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27
Q

What are investments?

A

“Investments” are transactions in which money is
contributed for the purpose of obtaining income or profit, but
which carries the risk of loss of all or part of the principal
contributed and income accumulated.

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28
Q

what are investment advisers?

A

“Investment Advisers” include any individual who offers

investment advice in exchange for compensation.

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29
Q

What are networking arrangements?

A

“Networking Arrangements” are agreements between
banks and third-party vendors that enable vendors to sell or
recommend investments to bank customers on bank premises or through customer referrals.

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30
Q

What are proprietary products?

A

“Proprietary Products” are products that the bank or bank

affiliate markets principally to bank or affiliate customers.

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31
Q

What are repurchase agreements?

A

“Repurchase Agreements” are contracts to sell and
subsequently repurchase securities at a specified date and
price.

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32
Q

What are sales representatives?

A

“Sales Representatives” recommend or sell investments on
bank premises or through customer referrals, and may be
NASD licensed and registered representatives or, where the
bank sells securities directly to customers pursuant to an
exception from registration, sales representatives may be
Bank Securities Representatives.

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33
Q

What are sweep accounts?

A

“Sweep Accounts” include any accounts that employ
prearranged, automatic funds transfers (above a preset dollar balance) from a deposit account to purchase securities. Sweep accounts also include accounts that use prearranged, automatic securities sales or redemptions to replenish a deposit account that falls below a preset dollar balance.

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34
Q

What are unsolicited transactions?

A

“Unsolicited Transactions” occur when customers direct
sales representatives to initiate transactions that were not
recommended or suggested by any individual connected with the investment sales operation.

35
Q

What should Board and Management oversight look like for retail investment sales?

A

Determine that the bank’s board of directors has adopted a written retail securities sales policy statement that contains the elements required in the Interagency Statement. The policy statement, in detail commensurate with the level and complexity of the securities sales program, should:

• Address the risks associated with the program;
• Summarize the program’s policies, procedures, and controls; and
• Clearly define the scope of any third party activities, and the bank’s monitoring of the third parties adherence
to the Interagency Statement and applicable laws and regulations.

Determine that the board of directors periodically reviews and updates, as necessary, the retail securities sales policy statement.

36
Q

For retail securities activities conducted through a networking arrangement or third party vendor, what should examiners verify? (3)

A

• The bank conducted an appropriate review of the third
party’s qualifications, experience, regulatory history,
financial condition, and references prior to entering into
the arrangement;

• The arrangement is controlled by a written agreement
that is approved by the bank’s board of directors

• Bank management periodically monitors the third party’s
compliance with the agreement. This function should be
performed by individuals that are not involved in any
part of the investment sales operation. Reviews may be
conducted by internal auditors, external auditors, or
other independent staffers.

37
Q

Third party vendor agreements should contain what elements? (10)

A

° Description of each party’s duties and responsibilities;

° Description of the permissible activities by the third party on bank premises;

° Controls for the use of bank space, personnel, and equipment;

° Detailed compensation arrangements for all bank and third party personnel;

° Requirement that sales representatives are appropriately trained, licensed, and qualified;

° Requirement that the third party comply with all applicable laws, regulations, and the Interagency Statement;

° Authorization for the bank to monitor the activities of the third party and its sales representatives and to periodically review compliance with the agreement;

° Authorization for the bank and its banking regulatory agency to have access to such records of the third party as are necessary or appropriate to evaluate compliance;

° Indemnification for the bank for potential liability caused by the third party’s sales activities; and

° Written employment contracts satisfactory to the bank for personnel employed by both the bank and the third party (dual employees);

38
Q

What should policies and procedures say about proprietary products offered by the bank? (4)

A

Determine that the board of directors established policies that guide the management and operations of any proprietary product, and maintains prudent oversight of all proprietary product operations, including those of the bank affiliates.

• Verify that the board’s policies:
° Require separation of duties between trading, sales, management, and accounting;
° Define bank management’s responsibilities;
° Establish an independent review function; and
° Outline strategies for potentially significant events, such as a capital injection.

39
Q

When reviewing retail securities sales program policies, procedures and internal controls what should examiners review for?

What elements need to be included in the bank’s policies and procedures and from where?

A

Determine that the retail securities sales program’s policies and procedures include a description of the following elements contained in the Interagency Statement:
• Types of products sold;
• Designation of employees to sell investment products;
• Supervision of personnel involved in sales;
• Permissible use of customer information; and
• Compliance procedures to ensure sales activities are conducted in accordance with applicable laws, regulations, and the Interagency Statement.

40
Q

When reviewing the Compliance program for retail investment sales, what areas should examiners review? (5)

A

Examiners should review the policies, procedures, and practices of the bank with regard to:

  • Policies, Procedures and Internal Controls
  • The Sales Setting (location)
  • Referrals
  • Product Suitability Analysis
  • Compensation
41
Q

What should examiners review with regard to the Sales Setting (location)?

A

Determine that the area in which security products are sold is physically distinct from the area in which retail deposits are
taken.

• Verify that employees do not make investment
recommendations, qualify customers, or take orders for
investment products, even if unsolicited, while located in
the routine deposit-taking area. (This includes reviewing
a bank’s policy, procedures, and any prepared scripts on
handling deposit customers, or customers whose
certificates of deposit are maturing.)

42
Q

What should examiners review with regard to referrals?

A

Verify that employees who are not authorized and qualified to sell securities only make referrals, and do not make investment recommendations, qualify customers, or take orders for investment products. (This includes reviewing a bank’s policy, procedures, and any prepared scripts on referring deposit customers, or customers whose certificates of deposit are maturing.)

• Determine that management and staff (including tellers and receptionists) adhere to all applicable laws, regulations, the Interagency Statement, and the bank’s securities sales policy when making customer referrals.

43
Q

What should examiners review with regard to product suitability analysis?

Sales representatives should make reasonable efforts to obtain what types of information about customers? (3)

A

Determine that in recommending to customers the purchase, sale, or exchange of any security, sales representatives gather appropriate and sufficient information from the customers and conduct a suitability analysis (sales representatives should have reasonable grounds for believing that a recommendation is suitable for a customer upon the basis of the information disclosed by the customer).

Sales representatives should make reasonable efforts to obtain the following types of information:

• Customer Investment Goals
° Risk tolerance
° Return objectives
° Tax considerations
° Liquidity
• Customer Financial Information
° Assets, liabilities, and net worth
° Income and expenses
° Investment portfolio composition
° Tax status
° Insurance

• Customer Nonfinancial Factors
° Age and retirement plans
° Family status
° Current and anticipated education needs
° Current and anticipated health care needs

Determine that sales representatives clearly explain all investment recommendations to customers and
provide complete information to customers regarding investment risks.

Verify that the sales representatives document the suitability analysis of their investment recommendations to customers.

44
Q

What should examiners review with regard to compensation?

A

Determine that compensation to bank employees for
customer referrals is a one-time nominal fee of a fixed
dollar amount for each referral, and that the
compensation is paid regardless of whether the referral
results in a transaction.

Determine that incentive compensation for bank
employees authorized to sell securities products is not
structured in such a way as to result in unsuitable
recommendations or sales being made to customers.

45
Q

When onsite what major areas should examiners review for an initial analysis?

Can examiners conduct an expanded review?

A
  • Compliance Program Evaluation
  • Sales practices evaluation
  • Disclosures, Notices, Confirmations, and Advertisements
  • Personnel Qualifications
  • Monitoring
  • Record Keeping

Examiners can conduct expanded reviews.

46
Q

Generally what should examiners review with regard to a bank’s sales practices?

A

If the bank conducts the securities transactions,
determine that the bank:

• Provides for the crossing of buy and sell orders on a
fair and equitable basis to the parties to the
transaction, where applicable and where permissible
under local law; and

• Provides for the fair and equitable allocation of
securities and prices to accounts when orders for the
same security are received at approximately the
same time and are placed for execution either
individually or in combination.

Verify that specific individuals are designated to exercise
supervisory responsibility for each of the bank’s securities
activities.

Verify that there is a separation of duties among securities
sales, management, compliance, and accounting personnel.

Determine that bank personnel who make investment
recommendations or obtain investment information as part of their duties report their own non-exempt securities
transactions to the bank each quarter.

47
Q

What additional sales practices should examiners review if a bank transacts retail hold-in-custody repurchase agreements involving government securities?

A
  • Determine that the bank enters into written repurchase agreements with customers that contain appropriate disclosures, including a disclosure that the funds held pursuant to the repurchase agreement are not deposits nor insured by the FDIC.
  • Verify that the bank maintains proper possession and control of the government securities that are the subject of the agreement with its customers in accordance with Treasury Regulation 450.4(a).
48
Q

What additional sales practices should examiners review for banks that hold government securities as a custodian or in safekeeping for the account of the customer? (2)

A 
• Determine that the bank maintains proper possession and control of the government securities it holds for its
customer accounts (including where the bank uses another institution or the Federal Reserve Bank to hold the securities).

• Determine that the bank maintains proper possession and control of the government securities it holds as a custodian for customer accounts of other institutions or government securities broker/dealers.

Safety and Soundness and Trust examination staff remain responsible for evaluating custodial holdings of government securities which are based on a trust or fiduciary relationship. If a bank claims an exemption to the Treasury Regulation 450 under 450.3, Exemption for holdings subject to fiduciary standards, examiners should verify that the requirements are met under that part of the regulation.

49
Q

Disclosures are required at minimum to include what content? (4)

A

Determine that standard disclosures, oral and written, and confirmation notices contain the required content, and are
provided to customers at the appropriate time in the proper format. In particular, verify that disclosures contain at least the following minimum required content:
• not insured by the FDIC;
• not deposits or obligations of the bank or its affiliates;
• not guaranteed by the bank or its affiliates; and
• are subject to investment risk, including possible loss of principal

50
Q

What notices and confirmations are banks required to provide to customers? (4)

A

Verify that the bank obtains the required customer acknowledgements of receipt of disclosures at the time the customer opens an account to purchase investment products.

Verify that the names of the security products being sold are not identical to the name of the bank.

Verify that the bank discloses, where applicable, the existence of any material relationships with an affiliate or an investment advisor as identified in the Interagency Statement.

Determine that when the bank represents that investment products are covered by insurance provided by any other entity than the FDIC, the bank also provides a clear and accurate explanation of this coverage.

51
Q

What should examiners verify about NDIP advertising?

A

Determine that advertisements or promotional material about retail securities are issued in accordance with the Interagency Statement, and in particular:

• Verify that any third party advertising or promotional
material clearly identifies the company selling the security product and does not suggest that the bank is the seller.

52
Q

What disclosures are required for proprietary products offered by the bank? (4)

In addition to the FDIC disclosures.

A

In addition to the minimum disclosures about the FDIC, also determine that sales representatives provide customers with disclosures of:

• Additional compensation earned for selling a proprietary
product rather than another product;

  • The product’s fee structure, as compared to other investment products offered at the bank;
  • The product’s risk profile, as compared to other investment products offered at the bank; and

• The product’s historical performance, as compared to
other investment products offered at the bank.

53
Q

What confirmations are required of banks that transact retail hold-in custody repurchase agreements involving govt securities? (2)

A

• Determine that the bank provides written confirmations at the end of the day of initiation of the repurchase transaction.

• Determine that the written confirmations
contain all required information.

54
Q

What confirmations are required of banks that hold govt securities as custodians or in safe keeping for the account of the customer? (2)

A
  • Determine that bank provides a written confirmation or safekeeping receipt for each security held for a customer.
  • Determine that the written confirmations or safekeeping receipts contain all required information.
55
Q

What should examiners ensure banks are doing with regard to personnel qualifications?

A

Determine that the bank investigates the backgrounds of employees and third party vendors it hires for its retail securities sales program, including confirming that applicants remain in good professional standing and are not subject to disciplinary or enforcement action by any securities self-regulatory agency, the SEC, or any state or federal bank regulatory agency.

Determine that security sales employees and management are qualified (appropriate licensing, registration, training, and experience) to conduct their authorized duties

56
Q

Where the bank is registered as a broker-dealer, bank securities reps must meet what professional qualifications?

A

-Obtain the applicable NASD licenses after passing standardized examinations

– Series 6: Investment Company and Variable Contract Products Limited Representative, authorized to sell only mutual funds and annuities.
– Series 7: General Securities Representative, may sell all securities except commodities.
– Series 11: Assistant Representative - Order Processing, can take and enter unsolicited orders, but cannot determine suitability or provide investment recommendations.
– Series 24: General Securities Principal, authorized to supervise all sales personnel.
– Series 52: Municipal Securities Representative, may sell only municipal and government securities.
– Series 62: Corporate Securities Limited Representative, may sell only corporate obligations.

57
Q

Where the bank sells securities pursuant to an exception from broker dealer registration, what are the personnel requirements of bank securities reps?

A

bank securities representatives must receive training which is the substantive equivalent of NASD licensing requirements
required for personnel qualified to sell securities as registered representatives.

58
Q

Where the bank sells securities through a third party networking arrangement, what are the personnel qualification requirements of sales representatives?

A 
sales representatives (dual employees and third party employees) must be NASD
licensed and registered.
59
Q

What should examiners review for with respect to NDIP monitoring?

What additional things should examiners review for banks that hold govt securities as a custodian or in safekeeping for the account of a customer?

A

Determine that the bank conducts independent compliance reviews (independent of security product sales and
management review staff and their monitoring activities) of
its retail securities sales program and that of any third party.

Verify that the findings of the independent reviews are periodically reported directly to the bank’s board of
directors, or committee of the board.

Determine that the bank reviews customer complaints to identify compliance issues, in particular, patterns of
inadequate disclosure and/or unsuitable securities recommendations and sales.

For custodians:
• Determine that the bank conducts counts or verifications
of government securities held for customers by the bank
or by other institutions at least annually, reconciles them
with account records, and documents findings within seven days.

60
Q

What are the recordkeeping requirements for NDIP, including bank’s that act as custodians?

A

If the bank conducts the securities transaction, determine that securities sales records containing all required information are properly maintained by the bank.

For banks that hold government securities as a custodian or in safekeeping for the account of a customer:
• Verify that customer government securities records are properly maintained and kept separate from other
records of the bank.

61
Q

What decision factors should examiners consider before conducting an expanded analysis of NDIP? (4)

A

After completing the assessment of the compliance management system, examiners should document their conclusions as to whether risks in the securities sales program area are adequately managed by the institution, as well as their responses to each of the following Decision Factors:

  1. Do the board of directors and management provide
    effective oversight of the retail securities sales program?
  2. Are policies, procedures, information systems, training,
    and licensing adequate for such sales activities?
  3. Does the institution adequately monitor customer referral
    and securities sales activities?
  4. Does the audit function include the securities sales
    program, and is it adequate?

Based on the examiner’s conclusions and responses to the above questions, examiners should determine the extent of transaction testing necessary to complete the compliance examination. If transaction testing is deemed appropriate, examiners should pull a sample of accounts and/or files and use the Expanded Analysis procedures

62
Q

When should examiners conduct an expanded analysis of NDIP?

A

When examiners identify material weaknesses in the bank’s
compliance management system that require further review
to complete their assessment and to determine the bank’s
compliance with applicable laws, regulations, and the
Interagency Statement. The entire set of expanded
procedures should not be applied automatically. Examiners
should implement only those expanded procedures that
address specific areas of significant risk, weakness, or
supervisory concern.

63
Q

What areas of review are included in the expanded analysis procedures? (9)

A
  • Disclosures, Notices, Confirmations, and Advertisements
  • Sales Setting
  • Suitability
  • Compensation
  • Monitoring
  • Sales Practices
  • Custodial Holdings of Govt Securities (If applicable)
  • Proprietary Products
  • IRA and KEOGH accounts
64
Q

What should be reviewed as part of an expanded analysis of disclosures, notices, confirmations, and advertisements of NDIP?

A

Sample customer account files to review disclosures and
written acknowledgments, including those incorporated into
credit applications; investment sales confirmations; and
investment account statements.

Review all advertising and promotional materials, including
the text of prepared scripts (telemarketing and platform).

65
Q

What should be reviewed as part of an expanded analysis of personnel qualifications?

A

Sample sales representative personnel files to determine that
they have the appropriate licenses and training, and to review
their regulatory histories.

66
Q

What should be reviewed as part of an expanded analysis of sales setting?

A

Determine that the retail securities sales setting is physically
distinct from the retail deposit area (visit additional sales
locations when practical).

In those instances where there is limited space in the bank,
determine that signage and other techniques are used to
clearly distinguish the retail securities sales setting from the
retail deposit area to avoid the potential for customer
confusion.

67
Q

What should be reviewed as part of an expanded analysis of Suitability? (6)

What about for unsolicited investment transactions?(2)

A

Sample customer account files to determine that retail
securities sales staff obtain and evaluate information
detailing each customer’s investment goals, financial
condition, and other factors before offering investment
recommendations.

Sample customer account files to determine that:
• Customers sign appropriate disclosure forms;
• Customer data has been updated periodically;
• Securities sales staff provide complete information to
customers regarding potential risks; and
• Recommendations conform to customer goals.

Analyze management and sales reports and promotions to:
• Evaluate sales activity for questionable practices, such as
account churning.
• Determine if promotions have prompted unsuitable
recommendation practices. For example, high volumes
of volatile instruments or dramatic increases in a
particular product’s sales may indicate suitability
concerns.

For unsolicited investment transactions (customers direct
investment sales representatives to initiate transactions that
were not recommended or suggested by any individual
connected with the securities sales program) and discount
brokerage operations (executes transactions directed by
customer and maintains customer accounts, but does not
provide investment advice):
• Verify that customers receive at least the minimum
required disclosures; and
• Verify that securities sales staff retains documentation
(preferably signed by the customer) which shows that the
transaction was initiated solely at the customers’ request.

68
Q

What should be reviewed as part of an expanded analysis on compensation? (2)

A

Review management reports, sales reports, and a sample of
employee securities sales compensation records to:
• Verify that customer referral fees are paid as a one-time
nominal fee of a fixed dollar amount for each referral,
and that the referral fee is paid regardless of whether the
referral results in a transaction.
• Determine that incentive compensation for bank
employees authorized to sell securities products is not
structured in such a way as to result in unsuitable
recommendations or sales being made to customers.

69
Q

What should be reviewed as part of an expanded analysis of monitoring?

A

Determine that the independent compliance review report
findings are presented to the bank’s board of directors.

Sample customer account files and evaluate the effectiveness
of the bank’s independent compliance review at identifying
and eliminating documentation deficiencies.

Determine that the independent compliance review tracks all
customer complaints.

70
Q

What should be reviewed as part of an expanded analysis of Sales practices?

A

Review sales records to ensure that only specifically
designated, authorized, and qualified personnel sell
investments.

71
Q

What should be reviewed as part of an expanded analysis of Custodial Holdings of government securities?

Both repurchase agreements (2) and safekeeping (4).

A

For hold-in-custody repurchase agreements involving
government securities:
• Review the repurchase agreements to ensure that they
contain required disclosures pertaining to FDIC
insurance and securities substitution, as necessary.
• Sample customer account files and verify that
confirmations are delivered to appropriate individuals in
the required format within the appropriate timeframe,
and that they contain all required information.

For custodial or safekeeping of government securities:
• Review custodian bank’s accounts and records to verify
that customer government securities are:
° Properly segregated from the assets of the bank,
custodian institution, and/or broker-dealer, as
appropriate, and
° Kept free from any lien, charge, or claim.
• Sample customer account files and verify that
confirmations are delivered to appropriate individuals in
the required format and that they contain all required
information.
• Determine that the annual counts of government
securities held for customers, as conducted by the bank,
are reconciled with customer account records and
custodian accounts, and properly verified and
documented.
• Determine that the bank’s records contain all required
information about each customer and each government
security held in custody or safekeeping.

72
Q

What should be reviewed as part of an expanded analysis on proprietary products?

A

Sample customer account files and verify that proper
disclosures are included.

NOTE: Where information is discovered which raises
concern that a bank’s sale of proprietary products raises
safety and soundness concerns, such as risk to liquidity or
capital adequacy, compliance examiners should promptly
refer the information to the appropriate DCP Regional
Office staff.

73
Q

What should be reviewed as part of an expanded sample of IRA and KEOGH accounts? (5)

A

Where the bank offers self-directed IRA or Keogh accounts, the Interagency Statement generally applies, except with respect to the suitability guidelines because self-directed accounts permit account holders to select their own investments, no investment recommendations should be solicited and no suitability issues should arise. However, an account is not truly self directed if the bank offers investment advice to the customer. In addition, the following management and internal controls apply.

Examiners should verify:

  • Asset and Accounting Controls
  • Documentation
  • Illegal Investments
  • Broker selection
  • Bank Brokerage
74
Q

For IRA and KEOGH accounts, when do the interagency procedures apply?

A

Where the bank offers self-directed IRA or Keogh accounts,
the Interagency Statement generally applies, except with
respect to the suitability guidelines.

The Interagency Statement does not apply to self-directed IRAs that are
invested entirely in insured deposits or that are part of a formal trust
agreement (trustee accounts).

75
Q

When reviewing IRA or KEOGH accounts what should examiners ensure with respect to Asset and Accounting controls? (3)

A

° Customer assets are segregated from bank assets and from other account assets;

° Accounting records reflect segregation of accounts; and

° Accounting controls facilitate proper income reporting, record asset types, and identify individual instruments.

76
Q

When reviewing IRA or KEOGH accounts what should examiners review with respect to documentation?

A

° Documentation clearly identifies and supports each
account.

NOTE: IRA documentation should include, at a
minimum, the required IRS trust/custodian
agreement (Form 5305, 5305A, or equivalent),
consumer disclosure agreement, signature card(s),
and beneficiary designation.

77
Q

When reviewing IRA or KEOGH accounts what should examiners review with respect to illegal investments?

What insider transactions are illegal? (6)

A

Illegal investments are not permitted, regardless of any contrary customer instructions.

° IRA funds are not used for certain insider transactions, including:
– Loans to the account sponsor or beneficiaries.
– Collateral for loans to the account sponsor or
beneficiaries.
– Purchasing assets from the account sponsor,
beneficiaries, or custodian bank.
– Selling assets to the account sponsor,
beneficiaries, or custodian bank.
– Investments in debt instruments of the custodian
bank or its holding company.
– Investments in equity securities of the custodian
bank or its holding company, unless acquired
from an independent third-party at fair market
value.

78
Q

When reviewing IRA or KEOGH accounts what should examiners review with respect to broker selection? (2)

A

Broker selection is based upon two principles:
– Management selects the best broker for the account.
– Brokers are selected based solely on the combination of lowest possible commission and best possible order execution.

NOTE: Management may not select a broker based on insider relationships, personal relationships, compensation of any type, or solely due to community ties (SEC Rule 28(e)).

79
Q

When reviewing IRA or KEOGH accounts what should examiners review with respect to bank brokerage? (6)

A

The bank uses its own brokerage operations only when:

– Management satisfies securities laws relative to broker selection.

– The customer receives full written disclosure (pursuant to FDIC General Counsel’s Opinion Number Six) of the bank’s or affiliate’s relationship to the broker and all compensation that the bank will earn.

– The account agreement expressly authorizes the specific activity.

– The bank complies with Employee Retirement Income Security Act (ERISA) and Internal Revenue Code provisions stipulating that the bank must either charge no fees, or only charge fees that recover direct costs.

– The bank automatically uses its brokerage for all transactions unless requested to do otherwise, but provides 30-day advance notice to accounts of all fee increases and permits accounts to immediately cease using the bank’s brokerage without penalty.

80
Q

For the following transaction, what are the applicable policies and or regulations that should be reviewed for?

A third party (employed solely by the third party) that is registered with the SEC as a broker/dealer sells or recommends investments to bank customers on bank premises or through bank customer referrals when the bank receives a benefit for the referral.

A
  • Interagency Statement on retail sales of NDIP
  • FDIC part 344 except when the broker dealer is fully disclosed to the customer and the customer has direct contractual agreement with the broker dealer.
81
Q

For the following transaction, what are the applicable policies and or regulations that should be reviewed for?

A third party (employed dually by the bank and the third party) that is registered with the SEC as a broker/dealer sells or recommends investments to bank customers on bank premises or through bank customer referrals when the bank receives a benefit for the referral.

A
  • Interagency NDIP statement
  • FDIC part 344, except when the broker dealer is fully disclosed to the customer and the customer has a direct contractual agreement with the broker dealer
82
Q

For the following transaction, what are the applicable policies and or regulations that should be reviewed for?

A bank establishes a cash management sweep account for its customer, with fund transfers pursuant to a hold in custody repurchase agreement involving govt securities.

A
  • Interagency NDIP statement
  • Treasury part 403.5(d)
  • Treasury part 450
  • FDIC part 344 except as provided in par 344.2(a)(2), part 344.7(a), and part 344.9(b)
83
Q

For the following transaction, what are the applicable policies and or regulations that should be reviewed for?

A bank establishes a cash management sweep account for its customer that transfers funds from a deposit account to purchase securities, and also initiates securities sales or redemptions to replenish a deposit account

A
  • Interagency statement on NDIP

- FDIC part 344, except as provided in part 344.2, part 344.7(a), and part 344.9(b)

84
Q

For the following transaction, what are the applicable policies and or regulations that should be reviewed for?

A bank holds govt securities as a custodian or in safekeeping for the account of the customer

A

-Treasury part 450

Compliance Laws and Regulations (35 decks)

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