By JAIME LEVY PESSIN
Do bank customers know the difference between keeping their money under
a mattress and taking it on a roller-coaster ride?
The National Association of Securities Dealers, the brokerage industry's
self-regulatory group, is worried that brokers based in bank branches
aren't doing a good enough job of telling customers that their
investments, unlike bank deposits, carry risks of loss. The issue is
becoming a bigger concern as the financial-services industry
consolidates and firms increasingly try to sell brokerage products to
their bank customers.
When customers of a bank have safe bank products that mature, "they
might be steered in the direction of an affiliate and sold products that
may or may not be suitable," says Emily Gordy, the NASD's vice president
of enforcement. The group has several open investigations of
bank-affiliated broker-dealers, and is also looking into whether brokers
who are based in banks are adequately trained and supervised.
Earlier this month, the NASD slapped an $850,000 fine on CCO Investment
Services Corp., a subsidiary of Citizens Bank of Rhode Island, for
failing to supervise sales of variable annuities and 529 college-savings
plans, among other compliance issues. Although the CCO case didn't deal
primarily with unclear lines between bank products and brokerage
products, the issue did play a part in the enforcement action.
Since 1999, when Congress repealed the Glass-Steagall Act—which
separated banking and brokerage operations—more firms have been
trying to squeeze the most from the relationships between their business
lines. This year, Citigroup Inc. started putting Smith Barney brokerage
offices inside Citibank branches. In July, UBS AG opened a New York City
office combining brokerage and banking services for ultra-high-net-worth
clients. In 2005, 23 local banks around the country signed up to have
brokers from PrimeVest, a unit of ING Groep NV, located in their branches.
But one-stop-shop arrangements raise the risk of being confusing to
consumers who view banks as places where their money is always
protected. "When one institution is buying a different institution, of
course you're going to try to leverage the asset you already have," says
Karen van Ingen, director of the securities arbitration clinic at
Brooklyn Law School in New York. "The problem arises when the public is
confused about what protections, if any, they're being offered when they
deposit money with the institution."
Licensed stockbrokers stationed in banks are required to make several
disclosures to indicate the products they are selling aren't as safe as
traditional bank fare. Dubbed by the industry as "Not, Not, May"
language, the disclosures must explain that brokerage products aren't
insured by the Federal Deposit Insurance Corp.; aren't obligations of,
or guaranteed by, the bank; and may lose value. They are supposed to
make disclosures verbally and in writing.
The disclosures don't always get made. In 2005, the NASD barred a
financial adviser who worked in a bank from the industry after it found
that, among other things, she didn't tell customers that variable
annuities weren't FDIC-insured and told some variable-annuity buyers
their money wouldn't be invested in the stock market.
The NASD's action against CCO Investment Services, indirectly owned by
Royal Bank of Scotland PLC, mentions bank employees—not registered
representatives—making cold calls to refer bank customers to the
brokerage business. The NASD found even though the firm's policies
prohibited nonregistered bank employees from discussing specific
products, there was no oversight to prevent that from happening. A
spokeswoman for Citizens Bank says the company is now in full compliance.
Ms. van Ingen and other investor advocates say they have seen several
cases in which elderly or non-English-speaking customers are persuaded
to shift their assets out of bank products and into products that carry
more risk. "The people we deal with haven't a clue," says law professor
Robert Talbot, director of the University of San Francisco's investor
justice legal clinic, who adds that he has been on the receiving end of
aggressive pitches at his bank. "All of a sudden they're talking to
people about investments...The fact that you could lose it all is never
really explained."
Brokerage firms that do business in banks say they are careful about
making sure their brokers are explicit when explaining the shift into
market-linked products. At Wachovia Securities branches located in
Wachovia Corp.'s banks, the brokerage business is kept segregated from
typical banking. "We don't have investment information on the teller
line," says Larry Sandor, managing director and chief compliance officer
at Wachovia Securities. "If you go into a bank branch, there's the
teller line and a smaller investment area… By the time they go through
the multiple-part process, it's very clear they're not buying a bank,
FDIC-insured product."
Although Wachovia Securities brokers are separate from bank employees,
some PrimeVest brokers have dual roles at the banks where they work.
PrimeVest President and Chief Executive Randy Ciccati says brokers have
to be especially clear when they try to sell an investment product.
Training and internal audits are key to making sure brokers are giving
the disclosures, he says. Mr. Ciccati says no firm is immune to customer
complaints. "We've had people who have signed the paperwork and then
said, 'Gosh, I didn't realize it was this or that product,' " he says.
"When the market's up, they're usually pretty happy."
