March 16, 1999

Re: Retail Sale of Nondeposit Investment Products on Bank Premises

Dear M ________:

This is in response to your letter of February 19, 1999, which requested information regarding California laws or regulations relating to the sale of nondeposit investment products by your clients on the premises of banks. You indicate that your clients are licensed broker dealers.

We are aware of no California law that expressly addresses the sale of nondeposit investment products by third parties on bank premises, nor do we have any regulations that deal with that topic. On the other hand, no California law prohibits such activity.

We, of course, examine California state banks with respect to the safety and soundness of their operations. Of particular concern with respect to third party sales of investment products on bank premises are the following principles of safety and soundness:

It must be clear to the customer that he or she is not dealing with the bank when transacting business with a third party on bank premises.

The customer must understand that he or she is not purchasing an obligation of the bank.

The customer must understand that the investment he or she is purchasing is not FDIC insured and is subject to loss of principal.

State banks are insured by the FDIC. Accordingly, they are required to conform to the federal interagency guidelines regarding the sale of nondeposit investment products, and we generally refer to the federal guidelines when assessing the safety and soundness of that activity.

This Department administers, among other laws, the Banking Law (Division 1 (commencing with Section 99) of the Financial Code). We express no opinion as to any other law or regulation, state or federal, that may bear on the matter discussed in your letter.

Very truly yours,

Acting Commissioner of Financial Institutions


Senior Counsel


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