RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES,
AND GOVERNMENT SPONSORED ENTERPRISES
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
JUNE 26, 1996
Chairman Baker and members of the Subcommittee, thank
you for the opportunity to discuss the Federal Deposit Insurance
Corporation's (FDIC) "Survey of Nondeposit Investment Sales at
FDIC-Insured Institutions" (Survey). The Survey is the first
statistically reliable study of the practices of banks and thrift
institutions selling mutual funds, annuities, and other nondeposit
investment products. It provides a comprehensive overview of the
banking industry's compliance with the 1994 Interagency
Statement on Retail Sales of Nondeposit Investment Products,
which I will refer to as the Interagency Statement.
Since the early 1980s, mutual funds have been the fastest
growing segment of the financial services industry. As the federal
deposit insurer, the FDIC has a special interest in making sure that
customers do not confuse FDIC-insured deposits with nondeposit
investment products. There is some evidence that confusion about
deposit insurance coverage exists in the minds of customers
regardless of whether mutual funds are sold by banks and thrift
institutions or by securities firms. The FDIC study, however, was
limited to banks and thrifts.
My written testimony discusses why the FDIC conducted
the Survey, what it found and what steps the FDIC is taking, in
cooperation with other regulators, to address the concerns that it
raised. I submit that written testimony for the record and I will
summarize it here.
The Survey was conducted to measure the extent to which
banks and thrifts selling investment products were informing
customers of basic information.
As bank sales of nondeposit investment products increased
in the early 1990s, so did reports of confusion among bank
customers about whether federal deposit insurance
covers the products and who ultimately is responsible if there is a
loss in the investment. To lessen this confusion, the FDIC and the
other federal bank regulators issued the Interagency Statement.
It provides that three essential disclosures must be made:
(1) that a nondeposit investment product is not insured by the
FDIC; (2) that the product is not a deposit or other obligation of
the bank or thrift or otherwise guaranteed by the bank or thrift; and
(3) that the product is subject to investment risk, including possible
loss of principal.
The Survey showed that -- while most banks were making
most disclosures most of the time -- there is need for improvement.
The Survey consisted of in-person and telephone
"customer" inquiries by trained interviewers. Twenty-eight
percent of the "customer" interviewers who inquired about
investment products in-person were not told that nondeposit
investment products lack FDIC insurance, and 55 percent of
interviewers who inquired by telephone did not receive that
Moreover, 30 percent of the in-person "customers" were
not informed that nondeposit investment products are not backed
by the bank or thrift and 60 percent of telephone "customers" were
not told this information.
Finally, 10 percent of the in-person "customers" at the bank
or thrift were not told about the risks associated with the
investments -- including loss of principal -- and 38 percent of the
telephone callers failed to receive this disclosure.
To address the areas of concern identified in the Survey,
the FDIC is taking immediate steps aimed at improving the
industry's disclosure and other sales practices.
First, the FDIC will provide training for bank and thrift
employees on what the Interagency Statement says and how to
follow the guidance it gives. I am convinced that banks and thrifts
recognize that it is important to make complete and timely
disclosures to customers when they sell uninsured products and
that they will take advantage of this training.
Second, the FDIC and other federal banking agencies are
reviewing the Interagency Statement for possible revisions to
clarify what constitutes a sales presentation, when it begins and at
what point disclosures are required.
Third, the FDIC is working with other regulators to require
that all bank employees selling nondeposit investment products
meet the securities industry's basic qualification, testing, reporting
and continuing education requirements.
Fourth, the FDIC is increasing its response to complaints
from bank and thrift customers about sales practices for these
products -- including referring complaints to appropriate
Fifth, the FDIC is revising its examination guidelines and
increasing examiner training in the areas covered by the
Sixth, the FDIC will continue to coordinate with the federal
and state banking and securities regulators, the Securities and
Exchange Commission and the National Association of Securities
Dealers to ensure that the rules and guidance governing sales of
nondeposit investment products at banks and thrifts are applied
In conclusion, Mr. Baker and members of the
Subcommittee, the steps that I have outlined will help ensure that
banks and thrifts provide their customers with sufficient, timely
information to make informed investment decisions. I look
forward to answering your questions.