Magazine article American Banker

Rules Would Make Banks Test Investors' Knowledge of U.S. Securities' Risks

Magazine article American Banker

Rules Would Make Banks Test Investors' Knowledge of U.S. Securities' Risks

Article excerpt

Under rules to be proposed next week, banks would have to determine whether a customer understands the risks associated with buying government securities . Industry representatives blasted the three banking agencies' plan, saying it would increase compliance costs.

"By putting all of these new parameters on banks, you've just added another checklist for a bank examiner to fill out," said Sarah A. Miller, senior government relations counsel at the American Bankers Association.

"It is not in banks' interest to screw their customers, because if they do, the customers just won't come back," she said.

Under the proposal, banks must take into account a customer's independent ability to evaluate the risks involved in buying government securities, including structured notes issued by government-sponsored enterprises.

Banks must also ask whether customers intend to use their own judgment, or rely on outside advisers, in making decisions regarding such investments.

While the rules would not explicitly require banks to document their compliance, they may have to defend their sales practices.

"We don't specify any documentation requirement," said William A. Stark, assistant director of supervision at the Federal Deposit Insurance Corp. "But for internal control purposes, the bank is going to have to keep files on its compliance."

Internal agency guidelines are currently used by examiners evaluating banks' sales of government securities. …

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