FDIC RECOMMENDS STEPS TO IMPROVE
BANK COMPLIANCE WITH MUTUAL-FUND DISCLOSURE
FOR IMMEDIATE RELEASE PR-31-96 (5-14-96)
Media Contact: Robert M. Garsson (202) 898-6993
FDIC Chairman Ricki Helfer announced today that the
agency is taking a series of steps to ensure that bank and thrift
customers have the information they need to understand fully the
risks involved with mutual funds and other uninsured products.
The FDIC Chairman acted after reviewing the results of a
year-long study on the sale of investment products at banks. The
study found that, for a number of banks, a gap exists between
regulatory guidelines governing the sale of investment products
and actual employee performance.
"Our study shows that more than a fourth of the banks
surveyed are still failing to make basic disclosures required
under guidelines we issued two years ago," she said.
"Twenty-eight percent of the customers in our survey were not
told that mutual funds lack deposit insurance. In 30 percent of
the cases, institutions failed to disclose that the products are
not obligations of the bank."
"Those results need to be improved," she added. The
survey results also make it clear that some parts of the
interagency statement on investment product sales need to be
clarified. For example, while many institutions asked some
questions aimed at matching customers with appropriate
investments, there is clearly some confusion about how much
information a financial institution must elicit under the
guidelines to be in compliance with the suitability requirements.
"The FDIC will work with the banking industry to ensure
that all bank customers are fully informed of the risks they are
assuming when purchasing mutual funds and other investment
products that do not carry federal insurance," Chairman Helfer
Chairman Helfer announced a number of initiatives that she
said would help banks improve their performance without adding
Renewed efforts to adopt requirements that bank
personnel engaged in the sale of investments take the securities
industry's standard qualifying examinations. The survey
demonstrated that a relationship exists between the level of
training of bank employees and the adequacy of the disclosures
they make. The FDIC is working with the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve
System, the National Association of Securities Dealers, the New
York Stock Exchange and the Municipal Securities Rulemaking Board
on this proposal.
Seminars sponsored by the FDIC to train bankers on
making complete and accurate disclosures in the sale of uninsured
Revision of the FDIC's examination guidelines and
an increase in the level of examiner training to ensure that
institutions are making the appropriate disclosures and are
engaged in efforts to match a customer's financial profile and
investment strategy with suitable investment products. In
particular, a questionnaire currently filled out by examiners
after each examination will be revised to assist the FDIC in
monitoring compliance with investment product disclosure
Reexamination of the interagency policy statement
on mutual fund sales to clarify the institution's obligation to
assure that an investment recommendation meets the customer's
Improvements in FDIC automated data systems to
provide high quality, up-to-date information that can be used by
examiners in the field to pinpoint problems.
Broader publication of the FDIC's toll-free
consumer hotline (1-800-934-3342), which fielded 66,214 calls
Evaluation, on the basis of ongoing examination
results, of the need for another survey in two years to assure
effective compliance by banks with disclosure and other
requirements for mutual fund sales.
The FDIC study was based on a survey conducted in 1995
by Market Trends, Inc., Bellevue, Washington. It involved the
deployment of trained interviewers who contacted banks in person
or by phone and used four different shopping scenarios. These
"customers" completed 7,800 contacts -- about half in person and
half by phone -- of more than 1,000 FDIC-insured institutions.
It is the largest survey of its kind ever undertaken, and was
designed to assure statistically verifiable results.
After receiving the report, the FDIC spent two months
verifying every statistical result in the survey. A series of
complex mathematical tests were performed to ensure that the
statistical significance of each finding could be specified
precisely. In addition, the FDIC hired a nationally recognized
expert in sampling and survey techniques, Dr. Seymour Sudman of
the University of Illinois, to verify the FDIC's calculations.
The agency will also be doing additional analysis of the data
generated by the survey.
Highlights of the study include the following findings:
Ninety-one percent of the in-person shoppers were
told that their investments were subject to market and
interest-rate risk, and that they could suffer a loss of
principal. However, only 72 percent were advised that their
investment was not insured by the FDIC and even fewer -- 70
percent of in-person shoppers -- were informed that mutual fund
and non-deposit investment products are not guaranteed by the
bank. All three disclosures are called for by the compliance and
Only 71 percent of the on-site customers who met
with an investment representative were directed to an area of the
bank that was physically distinct from the deposit-gathering
area, also a requirement of the regulatory guidelines.
Nearly 100 percent of the customers visiting banks,
and 96 percent of those who contacted banks by phone, were
directed to qualified investment representatives, as the
The study also found that most banks asked some questions
to determine which investment products best suited the needs of
individual customers. Seventy percent of the customers visiting
banks were asked at least two questions about their investment
objectives and risk tolerance.
The study focused on initial contacts; no "customer"
contacts were taken to the point of a final sale. "Customers"
also refrained from asking questions to avoid "leading" the sales
Because the study was conducted as a nationally projectable
sample survey, the results cited are subject to sampling
variability. Each statistic in the study is reported with a range
of variation that represents the 95 percent confidence interval
-- that is, the range in which the true population value would be
found 95 times out of 100.
Copies of the study results are available in the FDIC Public
Information Center at 801 17th Street, N.W., Room 100,
Washington, D.C., (703) 562-2200.
Congress created the Federal Deposit Insurance Corporation in
1933 to restore public confidence in the nation's banking system.
The FDIC insures deposits at the nation's 12,000 banks and
savings associations and it promotes the safety and soundness of
these institutions by identifying, monitoring and addressing
risks to which they are exposed.
FDIC press releases and other documents are available on the
Internet via the World Wide Web at www.fdic.gov.
They may also be obtained through the FDIC's Public Information
Center, 801 17th St. NW, Room 100, Washington, DC,