FDIC NDIP Exam Procedures

FDIC has issued examination procedures that contain detailed guides to the examination and audit process. But perhaps even more noteworthy is that the examination procedures contain more detail and guidance than the inter-agency policy statement. Because of this, a review of agency policy is not complete without also studying the FDIC's examination procedures.

While NDIP procedures are based on classic compliance procedures, the FDIC has placed the examination in the Safety and Soundness examination. This reflects the high level of the agency's concern about the impact that poorly managed investment products could have on the safety and soundness of the bank. This also means that the result of the examination will affect the bank's CAMEL rating.

During the examination, the examiner will look for - and evaluate the substance of - the program elements that the FDIC considers essential to safe and sound management of NDIP. One principle goal of the procedures is to assess how the bank's NDIP activity can affect the bank's safety and soundness. The other examination goal is to assess compliance with NDIP rules and policies.

Off-site Review
In keeping with the agency policy to minimize the examiner's time in the bank, the NDIP examination begins with an off-site review of the supporting materials for the NDIP program. The off-site review will include the bank policies and procedures, third party agreements, independent audits, promotional materials, customer complaints and the resolutions, disclosure forms, training materials and records, qualifications and training of staff, product activity and financial reports, and any other pertinent reports.

In addition to reviewing information provided by the bank, the examiners will request and review information from NASD. This will include a review of NASD examination findings of third party broker/dealers.

Thus, before arriving at the bank, the examiner should have a good picture of the bank's activity and already have targeted possible weaknesses.

Examination procedures on-site
On-site, the examination will look closely at program management, staff involved in NDIP sales, disclosure practices, the sales setting, how the bank treats customer and product suitability, review any proprietary products, and evaluate the independent review. If the basic examination reveals any deficiencies in any of these areas, the examination for that area will be expanded in scope.

Program Management
In this part of the examination, the examiners will review the organizational structure for the NDIP program. In particular, the examiners will assess the degree to which management has planned for the program and supervises the program. Thus, they will be looking for compliance program elements such as policies and procedures, documentation of customer complaints, qualifications and supervision of sales staff, and the frequency and substance of reviews and reports.

In addition to compliance with applicable laws, regulations, and agency policies, the examiner will determine whether the board and bank management are taking adequate steps to ensure safe and sound operations by establishing prudent NDIP procedures and controls.

When the bank is using a third party vendor, the examiner will review the contract to ensure that it has the required elements, including a provision to indemnify the bank from the third party vendor's NDIP activities, and providing the bank oversight of the process, including the authority to remove sales representatives from bank premises.

Personnel
The examination will include a review of the qualifications of personnel that conduct NDIP sales. The examiner will determine whether personnel have required qualifications, and have adequate and timely continuing education. Compensation will also be reviewed to ensure that the compensation plan is appropriate and does not motivate staff to make inappropriate recommendations.

Disclosures
Here lies the visible heart of the NDIP program. It forms the basis of what the customer understood and when they understood it. Because of the importance of disclosures, examiners will conduct a thorough review of disclosures. Finally, they will determine whether the NDIP sales staff obtains a written statement from customers that acknowledges receipt (and comprehension) of the disclosures.

Examiners will also review all complaints to determine whether they indicate a pattern of weaknesses in disclosures. Any sign of weakness will trigger an expanded examination. The weaknesses can be identified from customer complaints, a review of customer files, or any other aspect of disclosure policies and practices.

Sales setting
The purpose behind the sales setting is to create an environment that supports the disclosures by creating a setting that is visually or physically different from the deposit taking functions of the bank. The first test the examiner will conduct is to walk into the bank lobby and look at the setting to see it the way a customer would.

The examiner will also review procedures, including the steps taken when sales are made, to ensure that they are different and separate from the deposit account opening process. Conversations with bank staff will help the examiner to verify training levels and the way in which referrals and disclosures are made. This lobby behavior all supports (or undermines) the separate setting.

Again, customer complaints may raise issues about the setting. If complaints indicate that customers were confused about what they were purchasing, it raises concerns not only about disclosures but also about the sales setting.

Finally, the names of the investment products must be clearly distinguishable from bank products. Any use of the banks name or logo, even indirectly, will trigger careful scrutiny about possible customer confusion.

Suitability
The core examination procedures for product suitability are based on a review of policies, procedures, and customer complaints. The examiner will evaluate whether procedures and training are adequate. Then, the examiner will review customer complaints to see whether any suitability concerns are raised. As a routine matter, the examination will not include a review of customer files. However, if any questions are raised in the core examination, or any weaknesses are identified, the examination scope will be expanded and a review of files becomes the next step.

Independent audit
Examiners will also examine the independent audit. The examiner will determine whether the independent audit is effective at finding weaknesses in the program. The examiners will interview investment sales staff to learn their perception of the effectiveness of the independent review.

ACTION STEPS

Brief management and the board on the nature and scope of the NDIP examination. Use the opportunity to communicate what the agencies expect of the board and senior management.
Make sure that you are notified when the safety and soundness examination is scheduled. You will need to prepare for and manage the NDIP examination.
Maintain a duplicate set of records and reports to submit to the examiners. Remember, they more they review before they come, the less time they spend in the bank.
Conduct monthly reviews of customer complaints. Review the complaints for any pattern of concerns.
Also evaluate the response to and resolution of the complaint. Have this ready for the examiners.
Walk into any lobby in which your bank sells NDIP products. Evaluate how the setting looks and whether it is sufficiently separate from bank deposit functions.