Focus on NDIP

Third Party Agreements
For banks that have arrangements with third party vendors, the agreement between the bank and the vendor will be the most important document the bank prepares. It will be the examiner's starting point. It should deal with all of the issues raised in the policy statement.

Duties and responsibilities
The agreement should specify the duties and responsibilities of the third party vendor and the bank. It should also specify the duties of specific staff of each party. In drawing up a third party agreement, also provide for what the third party should not do. For example, if the bank believes that its customers are sensitive to certain types of sales approaches, the agreement could ban the use of those techniques.

The agreement should also include fairly detailed housekeeping provisions, such as access to bank supplies and equipment, who will pay for telephone service including long distance, who will supply promotional material, how the bank's stationary can be used, and when or how often promotional material may be included with regular bank mailings. In this context, be sure to provide for how the bank's name and logo may be used by the third party. Do this both to protect the bank's copyright and to minimize or prevent product confusion.

Access to records
All third party agreements should give the bank access to records of the vendor that relate to the bank customer transactions and to the way in which the vendor conducts business. It is the bank's responsibility to determine that the vendor is acting in compliance with all relevant regulations. This responsibility cannot be contracted away. The bank should also preserve its ability to monitor the vendor's compliance with their agreement. The independent audit must have access to records of the vendor to determine the program's compliance.

In addition to the bank's access to records, the agreement should provide for bank examiners' access to the vendor's records. Examiners must be able to review the vendor's records to determine whether the vendor is in compliance with the policy statement. The purpose of the examination is to determine that the vendor is not conducting transactions in a way that will threaten the safety and soundness of the bank. The examiner cannot do this without access to records.

Third party compliance
When a customer misunderstands the transaction (or simply regrets it later) it is important that the bank has already taken actions to minimize the bank's liability. Thus, the third party agreement should include provisions holding the vendor to a high standard of compliance. At a minimum, the agreement should provide that the third party will provide with all pertinent laws and regulations.

Since the third party is most likely to look to the SEC and NASD for regulatory guidance, it would be a good idea to also specify that the vendor will comply with any rules, policies, or guidance issued by the bank regulatory agencies. Specifically include a provision that the third party will comply with the disclosure provisions of the agencies' policy statement. It will not be enough to rely on the fact that the agencies' policy exists. The bank needs to ensure that it has the ability to hold the third party vendor to its terms.

Indemnify the bank
It's always worth a try. The agencies recommend that your third party contracts include a provision that the vendor will indemnify the bank for potential liability resulting from any action of the vendor or its agents. These clauses won't always get the bank off the hook, but they do significantly strengthen the bank's ability to negotiate. It can be most useful as a tool for motivating the vendor to comply with the agencies' policy statement.

Written employment contracts
The bank should maintain some power to determine the personnel working in its facility. The bank should also maintain the ability to ensure that the vendor's employees are qualified. The third party agreement should therefore give the bank the ability to set standards and qualifications for employees of the vendor who will be working in the bank's facility.

If the employee is to be a joint employee of the bank and the vendor, the bank should retain the ability to maintain an employment contract that meets the bank's policy standards.

ACTION STEPS

If you are currently selling non-deposit investment products through a third party, review your third party agreement and be sure it provides for the required elements. Look particularly for the ability of the bank to review the third party's records.
If you are developing a third party agreement, make a list of all the elements the agreement should include. Meet with the bank staff that is developing the third party agreement, provide them with the list, and explain the terms they must include in the contract. Better yet, offer to help work on it.
Review your bank's procedures for employment contracts. Any agreement with third party vendors should be consistent with bank hiring practices. Also, make sure the agreement gives the bank the authority to "fire" a broker/dealer employee from the bank sales team.
Make sure the agreement provides for indemnification of the bank for third party actions.
If the bank hasn't realized it by now, the agreement should be reviewed by, if not drafted by, the bank's counsel.