21 Va. Admin. Code § 5-20-330
Current through Register Vol. 41, No. 6, November 4, 2024
Section 21VAC5-20-330 - Model rules for sales of securities at financial institutionsA. This section applies exclusively to broker-dealer services conducted by broker-dealers and their agents on the premises of a financial institution where retail deposits are taken or through an affiliate of the financial institution. This section does not alter or abrogate a broker-dealer's obligation to comply with other applicable laws, rules, or regulations that may govern the operations of broker-dealers and their agents, including but not limited to, supervisory obligations. Broker-dealers are responsible for the acts, practices, and conduct of their agents in connection with the offer and sale of securities. Additionally, this section does not apply to broker-dealer services provided to nonretail customers.
B. For purposes of this section, the following terms have the meanings indicated: "Affiliate" means
(i) an entity that a financial institution owns, in whole or in part or (ii) an entity that is a subsidiary of the financial institution's parent company. "Broker-dealer services" means the investment banking or securities business as defined in paragraph (u) of Article I of the FINRA By-Laws, amended by SR-FINRA-2008-0026, effective December 15, 2008.
"Financial institution" means federal and state-chartered banks, savings and loan associations, savings banks, credit unions, and the service corporations of such institutions located in Virginia.
"Networking arrangement" means a contractual or other arrangement between a broker-dealer and a financial institution by which the broker-dealer conducts broker-dealer services on the premises of the financial institution where retail deposits are taken or through an affiliate of the financial institution.
C. Standards for broker-dealer conduct. No broker-dealer shall conduct broker-dealer services pursuant to a networking arrangement unless the broker-dealer and its agents comply with the following requirements:1. Setting. Wherever practical, broker-dealer services shall be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. In those situations where there is insufficient space to allow separate areas, the broker-dealer has a heightened responsibility to distinguish its services from those of the financial institution. In all situations, the broker-dealer shall identify its services in a manner that clearly distinguishes those services from the financial institution's retail deposit-taking activities. The broker-dealer's name shall be clearly displayed in the area in which the broker-dealer conducts its services.2.a. Networking arrangements. There shall be a written agreement between the financial institution and its associated broker-dealer that shall, at a minimum, address the areas listed below. The written agreement shall be filed with the commission at its Division of Securities and Retail Franchising at least 90 days prior to its effective date.(1) A description of the responsibilities of each party, including the features of the sales program and the roles of registered and unregistered personnel;(2) A description of the responsibilities of broker-dealer personnel authorized to make investment sales or recommendations;(3) A description of how referrals to associated broker-dealer personnel will be made;(4) A description of compensation arrangements for unregistered personnel;(5) A description of training to be provided to both registered and unregistered personnel;(6) A description of broker-dealer office audits to be conducted by the broker-dealer, including frequency, reports associated with financial institutions and records to be reviewed;(7) Authority of the financial institution and regulators to have access to relevant records of the broker-dealer and the financial institution in order to evaluate compliance with the agreement; and(8) A statement identifying whether the broker-dealer will offer or sell securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506) .b. Program management. The program's management of the broker-dealer's networking arrangements shall address and include at a minimum, those items listed below. (1) A description of relevant referral activities and compensation arrangements;(2) A description of appropriate training requirements for various classes of personnel;(3) The scope and frequency of compliance reviews and the manner and frequency of reporting to broker-dealer compliance supervisors and the financial institution compliance management group;(4) The process of verifying that security purchases and sales are being conducted in accordance with the written networking agreement;(5) The permissible use of financial institution and broker-dealer customer information, including how compliance with Virginia and federal law and with the broker-dealer's privacy policies will be achieved;(6) The existence of any potential conflicts of interest between the broker-dealer activities and the financial institution and its affiliates and appropriate disclosure of the conflicts that result from the relationship; and(7) A description of the method in which the broker-dealer will determine the suitability of the securities for its customers and a description of the supervisory procedures imposed for the offer and sale of securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506) .c. If a financial institution has a networking arrangement with a registered broker-dealer, an affiliate of the financial institution may also be registered as a broker-dealer and may also employ agents that are registered with the broker-dealer with which there is a networking arrangement. If the financial institution's affiliate is a registered broker-dealer, and both the affiliate and the broker-dealer operating under a networking arrangement employs dual agents, both the broker-dealer and the affiliate are equally responsible for the supervision of the agents. The agents must be registered for both the broker-dealer and the affiliate.3. Customer disclosure and written acknowledgment.a. At or prior to the time that a customer's securities brokerage account is opened by a broker-dealer on the premises of a financial institution where retail deposits are taken, the broker-dealer or its agents shall: (1) Disclose, orally and in writing, that the securities products purchased or sold in a transaction with the broker-dealer: (a) Are not insured by the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union Administration ("NCUA");(b) Are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and(c) Are subject to investment risks, including possible loss of principal invested.(2) Make reasonable efforts to obtain from each customer during the account opening process a written acknowledgment of the disclosures required by subdivision C 3 a (1).(3) Provide written disclosures that are conspicuous, easy to comprehend and presented in a clear and concise manner.(4) Disclose, orally and in writing, that the broker-dealer and the financial institution are separate entities, and when mutual funds or other securities are bought through the broker-dealer, the client is doing business with the broker-dealer and not with the financial institution.(5) Disclose, orally and in writing that the broker-dealer and the financial institution will likely receive compensation as a result of the purchase of securities or advisory services by the client through the broker-dealer.b. If broker-dealer services include any written or oral representations concerning insurance coverage, other than FDIC insurance coverage, then clear and accurate written or oral explanations of the coverage must also be provided to the customers when such representations are first made.4. Communications with the public. a. All of the broker-dealer's confirmations and account statements must indicate clearly that the broker-dealer services are provided by the broker-dealer. Such indication may include the name of the financial institution or any of the financial institution's affiliates, but the name of the broker-dealer shall be in print larger than the name of the financial institution.b. Advertisements and sales literature that announce the location of a financial institution where broker-dealer services are provided by the broker-dealer or its agents, or that are distributed by the broker-dealer or its agents on the premises of a financial institution, must disclose that securities products: are not insured by the FDIC; are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and are subject to investment risks, including possible loss of the principal invested. The shorter logo format described in subdivision C 4 d may be used to provide these disclosures.c. Recommendations by a broker-dealer or its agents concerning nondeposit investment products with a name similar to that of a financial institution must only occur pursuant to policies and procedures reasonably designed to minimize risk of customer confusion.d. The following shorter logo format disclosures may be used by a broker-dealer or its agents in advertisements and sales literature, including material published, or designed for use, in radio or television broadcasts, automated teller machine ("ATM") screens, billboards, signs, posters and brochures, to comply with the requirements of subdivision C 4 b provided that such disclosures are displayed in a conspicuous manner:e. As long as the omission of the disclosures required by subdivision C 4 b would not cause the advertisement or sales literature to be misleading in light of the context in which the material is presented, the disclosures are not required with respect to messages contained in:(1) Radio broadcasts of 30 seconds or less;(2) Electronic signs, including billboard-type signs that are electronic, time and temperature signs and ticker tape signs, but excluding messages contained in such media as television, on-line computer services, or ATMs; and(3) Signs, such as banners and posters, when used only as location indicators.5. Notification of termination. The broker-dealer must promptly notify the financial institution if any agent of the broker-dealer who is employed by the financial institution is terminated for cause by the broker-dealer.6. Referral fees paid to unregistered financial institution employees. Unregistered financial institution employees may only receive a one-time nominal fee of a fixed dollar amount for each customer referral, and only if the payment is not contingent on whether the referral results in an investment activity or a transaction.7. Prohibited conduct. In addition to the provisions of subsections A and B of 21VAC5-20-280, unless otherwise specified herein, broker-dealers and broker-dealer agents offering broker-dealer services in association with a financial institution or an affiliate of the financial institution, pursuant to a networking arrangement, shall not:
(1) Accept or receive compensation directly or indirectly from the financial institution for broker-dealer services provided;(2) Identify themselves as being affiliated with the financial institution or any of the financial institution's affiliated companies;(3) Fail to follow the terms of a networking agreement between a financial institution or any affiliated company of the financial institution concerning the offer and sale of securities; and(4) Use nonregistered employees of the financial institution or any affiliate of the financial institution to solicit investors.21 Va. Admin. Code § 5-20-330
Derived from Virginia Register Volume 15, Issue 22, eff. July 1, 1999; amended, Virginia Register Volume 23, Issue 23, eff. July 1, 2007; Volume 29, Issue 20, eff. June 3, 2013.Statutory Authority
§§ 12.1-13 and 13.1-523 of the Code of Virginia.