Navigating the New Oversight OCC Guidelines. Kevin Larson Brett Bowers

Transcription

1 Navigating the New Oversight OCC Guidelines Kevin Larson Brett Bowers

2 Agenda Timeline Products covered under the NDIP Networking arrangements Key points to consider 5 risks to address in your NDIP Concerns at the bank level

3 Timeline In the mid 1980 s banks started offering non-deposit investment programs (NDIP) to their clients 1994 Creation of the Interagency Statement on Retail Sales of NDIP by the 4 banking regulators 1999 Gramm-Leach-Bliley amendment to Securities Exchange Act of 34 replacing a blanket exemption from broker-dealer registration 2007 Regulation R adopted a single set of certain GLBA exceptions 2015 OCC release Comptrollers Handbook titled Retail Nondeposit Investment Products

4 Products covered under the NDIP requirements All products that are defined under the Federal Reserve s Regulation D are covered under the NDIP requirements Securities offered through broker dealers Investment advice offered via registered investment advisor Insurance products offered through an insurance agency

5 Networking arrangements In order for a bank to offer NDIP products to their clients they must first enter into a networking arrangement with the respective company There are 3 types of networking arrangements Direct based solely on their bank charter Affiliated arrangement Unaffiliated arrangement

6 Networking arrangements - Direct Direct based solely on their bank charter 1999 Gramm-Leach-Bliley Act amended their definition of a broker dealer to allow for this option Limited in scope and offerings Allowable activities include trust and fiduciary, deposit sweep, custody and safekeeping, transactions in exempt securities,

7 Networking arrangements - affiliated Affiliated arrangement This type of arrangement is common in larger banking organizations that want to internalize the costs associated with the functions of running a broker dealer > Compliance/Risk > Operations > IT

8 Networking arrangements - Unaffiliated Unaffiliated arrangement This type of arrangement is common in any size of banking organizations that want to limit their risk by contracting with a third party broker dealer who is now responsible for the costs associated with the functions of running a broker dealer > Compliance/Risk > Operations > IT

9 Key points to consider in this new handbook Lack of clarity in some sections as guidance may only be applicable to one of the three networking arrangements What type of networking arrangement do you have Knowing your role are you responsible for the risk or for monitoring the networking agreement for appropriate controls Transaction risk networking firm is responsible for the transaction risk not the bank Regulatory oversight networking firm is responsible for SEC, FINRA, State, and DOL rules and regulations Privacy requirements the responsibility between the bank or networking firm is determined by the nature of activity

10 Key points to consider in this handbook What has changed with the release of these guidelines Nothing except the way the OCC examination teams conduct examinations of banks who offer NDIP These requirements have always been around, it is now that the OCC examination teams are placing an emphasis on these requirements

11 Risks to address within your NDIP Each bank has a responsibility to adopt risk management process commensurate with the level of risk The 5 risks that are identified: Compliance Operational Strategic Reputational Credit

12 Compliance risks to address within your NDIP Compliance with the statutory exceptions under the definition of Broker Ensuring each of the Interagency Statement guidelines applicable to the networking firm are addressed by the bank Verifying that the networking firm and their representatives are complying with applicable rules and regulations along with any limitations imposed by the NDIP sales program Adherence to Regulation R Private labeling and eliminating any potential confusion

13 Operational risks to address within your NDIP Arise from inadequate bank oversight of employees, sales practice misconduct, poor customer service, or adverse events that have taken place. Implement a due diligence process when selecting and monitoring a networking firm Regular communication to the banks Board of Directors Establish regular meetings with managers of the networking firm to determine any global issues for future consideration

14 Strategic risks to address within your NDIP This starts with the initial business planning and implementation to identify the appropriate resources Having a Board approved Interagency Statement Putting in place the appropriate monitoring requirements > Too often the bank doesn t do enough or does too much thus opens them up to additional risks Ongoing reporting of information back to the Board Not working with the networking firm to create an oversight program

15 Reputational risks to address within your NDIP Unsuitable sales practices, client misunderstandings, and poor customer service exposes the bank to significant reputational risk Product selection, sales supervision, and representative hiring are your key lines of defense When utilizing a private label, it increases the possibility of client confusion with who is really offering the investments Appropriate identification of individuals who are providing NDIP to clients Training of all bank employees is critical

16 Credit risks to address within your NDIP Regulation U bank extends credit to a client that is secured by securities in a brokerage account This would be a separate loan agreement between the client and the bank In a merger situation, review these documents Regulation T broker dealer extends credit to a client through the extension of margin loans The bank is not involved in the transaction thus credit risk is avoided by the bank

17 Concerns at the bank level Formalized NDIP program including approval from the Board of Directors Regular ongoing meetings with the Board of Directors addressing any concerns Consider any product limitations that the investment center can sell and document the reason for the limitation Due diligence on the product/product categories that the investment center is able to sell Know the difference in the commission payouts between products and monitor for over concentration

18 Concerns at the bank level Structure a compensation agreement with the advisor and licensed banker to help reduce a conflict of interest Monitor the volume of business of their licensed bankers and consider a cap Understand the pros and cons with the products that are being offered through the investment center Don t try to recreate the wheel, work with your networking firm/broker dealer when establishing an oversight program

19 Questions