Q&As regarding the Proposed Amendment to Section 209 (underlined) of H.R. 3505, the Financial Services Regulatory Relief Act of 2005
SEC. 209. SELLING AND OFFERING OF DEPOSIT PRODUCTS.
Section 15(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(h)) is amended by adding at the end the following new paragraph:
`(4) SELLING AND OFFERING OF DEPOSIT PRODUCTS- No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall directly or indirectly require any individual who is an agent of 1 Federal savings association (as such term is defined in section 2(5) of the Home Owners' Loan Act (12 U.S.C. 1462(5)) in selling or offering fixed rate fully FDIC insured deposit (as such term is defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) products issued by such association to qualify or register as a broker, dealer, associated person of a broker, or associated person of a dealer, or to qualify or register in any other similar status or capacity, if the individual does not—
`(A) accept deposits or make withdrawals on behalf of any customer of the association;
`(B) offer or sell a deposit product as an agent for another entity that is not subject to supervision and examination by a Federal banking agency (as defined in section 3(z) of the Federal Deposit Insurance Act (12 U.S.C. 1813(z)), the National Credit Union Administration, or any officer, agency, or other entity of any State which has primary regulatory authority over State banks, State savings associations, or State credit unions;
`(C) offer or sell a deposit product that is not a fixed rate fully FDIC insured deposit (as defined in section 3(m) of the Federal Deposit Insurance Act (12 U.S.C. 1813(m)));
`(D) offer or sell a deposit product which contains a feature that makes it callable at the option of such Federal savings association; or
`(E) create a secondary market with respect to a deposit product or otherwise add enhancements or features to such product independent of those offered by the association.'.
- Why is the amended language necessary?
a)At one time, most CDs paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complex. Investors may now choose among variable rate CDs, jumbo CDs, and CDs with other special features.
b)Agents of thrifts are now selling jumbo CDs and market based CDs, which are riskier than traditional deposit products and not fully insured by the FDIC. This puts investors at risk of losing any amount over $100,000.
c)Many investors assume that the salesperson representing a financial institution is fully backed by the institution and is either an employee, or akin to an employee. Since this is not the case with many of the salespeople selling CDs, investors would benefit from state securities oversight.
- Will the amendment require employees of federal savings associations (thrifts) to register with state securities regulators?
No, banks and bank employees fall under the jurisdiction of banking regulators. The concern lies with non-bank employees, otherwise known as agents of the bank. These are individuals who don’t have the employee affiliation with the thrift, do not have the same training, and do not fall under the supervision of the thrift. These “independent” agents need oversight.
- Are certificate of deposit securities?
a)There is no dispute that CDs fit the statutory definitions of a “security” under federal law as well as state law. They constitute “notes” and “evidence of indebtedness.”
b)The Supreme Court has created a limited exception for certain types of CDs that need not be regarded as securities. However, the exception applies only where the instruments are subject to regulation under another statutory scheme that adequately protects investors against risk. See Marine Bank v. Weaver, 102 S. Ct. 1220 (1982) (regulation of CDs under securities law was found unnecessary where the CDs were fixed-rate, FDIC-insured, and not offered through an intermediary broker or agent).
c)Where CDs pose risks that the banking laws do not address, the courts will not hesitate to invoke the securities laws to ensure that investors are adequately protected. Those risks may arise from the nature of the CDs being offered or the manner in which they are sold. If, for example, the CDs pose risk because they are uninsured or linked to market volatility through a variable rate, then regulation of the sale of those products under the securities laws is warranted. Alternatively, if the CDs are marketed through brokers or intermediaries who may offer enhancements, provide a secondary market, or engage in churning, unauthorized trading, or fraudulent sales practices, and then the sale of those products as well must be regulated under the securities laws.
d)Section 209 of the Regulatory Relief Bill reflects these basic principles of law governing CDs. Limiting the operation of the bill by adding the phrase “fixed rate fully FDIC insured” helps capture two of the most important risk-reducing features already recognized in the case law.
- What is the benefit of registering the agents with state securities regulators?
Current securities registration provides needed supervision of agents, disclosure of commissions, suitability requirements, complaint reporting and other benefits. Any cost of registration is certainly outweighed by the positive return to investors. State securities registration would allow the state to verify that the salesperson does not have a disciplinary history of fraud or misconduct and that the individual is qualified.
Investors need a state office to contact if they have a complaint or reason to believe a misrepresentation of the facts was committed.
- What problems may arise from agents selling CDs?
An example of a problem involving the sale of CDs is an Illinois case involving an investor who dealt with an insurance agency that sells CDs for its banking affiliate.
The investor’s IRA funds were used to purchase the CD and rather than following the investor’s request to place the CD in an IRA account, the “agent” opened a non-IRA account, resulting in IRS and other penalties. Not only was the insurance agent “independent” of the bank, but the assistant who sold the CD was even further removed from the bank and lacked sufficient knowledge of the ramifications of the transaction. The investor spent many months attempting to undo the “agents” error and eventually contacted the securities administrator for assistance.
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