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[12.23.06]
Networking arrangements for a bank's non-deposit investment
product offerings
To increase fee income and
provide customers with additional products and services, a bank may include in
its product-mix, non-deposit investment products (NDIPs). These products
include equities, bonds, fixed or variable annuities, mutual funds, etc. The
bank may distribute these products through a networking arrangement and/or
conduct the NDIP activity directly. In other words, a bank may have its
in-house NDIPs, and/or it may offer such products to its customers by entering
into a networking arrangement with a financial services corporation (e.g. a
registered broker/dealer, insurance company, etc.). For BSA/AML purposes, the
customer buying the NDIP offerings through the networking arrangement becomes a
customer of the financial services corporation, while continuing as a bank
customer for the traditional banking products and services.
The following table summarizes
the characteristics of—and the BSA/AML compliance responsibilities
associated with—three principal types of NDIP networking arrangements
(e.g. co-branded product, dual-employee, and third-party arrangement).
| Types |
Characteristics and BSA/AML Compliance
Responsibilities |
| Co-branded product arrangement |
Characteristics
- Offered by another company or financial
services corporation in co-sponsorship with the bank
- Product sold exclusively at that bank
and carries the name of the bank and the financial services company (e.g. a
mutual fund)
BSA/AML Compliance
Responsibility
- Because of this co-branded
relationship, the BSA/AML compliance responsibility becomes complex (e.g.
responsibility for CIP, CDD and suspicious activity monitoring and
reporting)
- The bank must understand each party's
contractual responsibilities and ensure adequate control by all parties
|
| Dual-employee arrangement |
Characteristics
- The bank and the financial services
corporation have a common (shared) employee who may conduct banking business as
well as sell NDIPs or sell NDIPs full time
- The bank retains responsibility over
the NDIP activities in a dual employee arrangement
BSA/AML Compliance
Responsibility
- A registered representatives (RR) may
be a dual employee of the bank and the broker/dealer
- When the dual employee is a RR
selling/buying NDIPs, the broker/dealer is responsible for monitoring the RR's
compliance with applicable securities laws and regulations applicable to the
NDIPs, the broker/dealer, and the customer
- However, the bank retains
responsibility over NDIP activities, even if contractual agreements establish
the financial services corporation as being responsible for BSA/AML compliance.
Therefore, the bank must ensure appropriate oversight and compliance with all
regulatory requirements
- When the dual employee is providing
bank products or services, the bank has the responsibility to monitor the
employee's compliance with BSA/AML related to those products and services
|
| Third-party arrangement |
Characteristics
- May involve leasing a bank's lobby
space to a financial services corporation to sell NDIPs
- In this case the third party must
differentiate itself from the bank
BSA/AML Compliance
Responsibility
- If appropriately implemented,
third-party arrangements do not affect the BSA/AML compliance requirements of
the bank
- The bank must ensure that the financial
services corporation has an adequate BSA/AML compliance program related to CDD
and suspicious activity detection and reporting
|
Bank management must be aware of
the BSA/AML risks of NDIPs and develop appropriate policies and procedures to
mitigate such risks. Management must also review the financial services
corporation before entering into a networking arrangement with it. For example,
in the case of a networking arrangement with a broker/dealer the review may
include an assessment of the broker/dealer's financial status, management
experience, NASD registration status, reputation, and ability to fulfill its
BSA/AML compliance responsibilities related to the bank's customers.¹
Bascom Consulting, Inc.
has recently prepared BSA/AML policies and procedures for one bank with
deposit-broker relationships. In addition, it has assisted the client to
conduct EDD on these deposit/brokers. For additional information on NDIPs and
the relevant BSA/AML compliance program, contact Dr. Bascom, principal
consultant at Bascom Consulting, Inc. at
WOBascom@bascomconsulting.com.
¹ For additional
information see FFIEC BSA/AML InfoBase, Non-deposit Investment
Products-Overview,
www.occ.treas.gov/BSA/pages_manual/OLM_071.htm. This article
is based on that overview. |
