Brave New Banking World Brings Pitfalls

Confusion among clients, including the elderly, is producing complaints and lawsuits as banks move beyond simple deposits to the sale of uninsured securities by brokers in bank lobbies

FLORIDA retiree Max Wells is miffed.

``I was deliberately taken. I told them three times I didn't want any risk,'' Mr. Wells says in a telephone interview from his home in St. Petersburg.

Another swampland sales scam? A penny stock swindle? Nope. Wells was dealing with a regional bank.

A year ago, Wells put $5,400 into what he thought was a government-insured account, supposedly ``guaranteed to earn 5 percent over five years,'' he claims. Two months later, Mr. Wells received a statement in the mail saying his NationsSecurities mutual fund account had dropped in value. ``Nobody said anything about a mutual fund,'' he fumes.

In case you missed it, your banker may now be a broker. For the first time since the Depression, the legal wall blocking banks from selling securities is being seriously breached. Banks are aggressively fulfilling the promise of one-stop financial shopping - stocks, bonds, insurance, and home mortgages all sold under one roof. Banks have already captured more than $300 billion in mutual fund assets (14 percent of the national total) since 1990, according to the Investment Company Institute, a Washington-based mutal fund industry trade group.

But beyond the promise lies a peril. The transformation from bank to brokerage firm is provoking customer confusion and, in some cases, unexpected financial losses for retired Americans with little means to recoup savings.

Complaints and lawsuits

``Bank customers are risk-averse people,'' says Jonathan Alpert, Wells's attorney. ``Millions of taxpayer dollars have been spent over the years to give banks credibility, stability, status, and an air of impregnability. The banks are using that trust to trick people into buying securities.''

Wells and other disgruntled customers have caught the attention of the banking industry with a multimillion-dollar class-action lawsuit filed this summer against NationsSecurities and its parent company, NationsBank, a Charlotte, N.C.-based bank with about 1,900 offices in 10 states.

About 60 NationsSecurities stockbrokers have also filed arbitration claims, most in the last month, with the National Association of Securities Dealers (NASD), a New York-based securities industry self-regulatory organization, complaining that the bank's brokerage unit encouraged them to mislead bank customers. Two other Southeastern banks have legal claims pending in similar cases and state securities regulators say a rising number of complants suggests a pattern of abusive practices.

NationsBank attorney Peter Aldrich calls the allegations ``wild'' and ``totally false,'' in a statement filed with the NASD. Bank officials say brokers employing underhanded sales tactics are fired because such practices are illegal and bad for business. ``Banks look for long-term relationships,'' Alfred Pollard told a congressional hearing on the issue last month.

``Banks have every incentive to maintain customer confidence by demonstrating that banks are the most trusted providers of financial services,'' says Mr. Pollard, a senior director of The Bankers Roundtable, a Washington-based trade group composed of executives from the nation's largest banks.

The confusion stems from what goes on in today's bank lobby. Once a genteel place where federally insured deposits were taken, banks are subtly but rapidly becoming high-powered sales rooms for uninsured securities. Larger regional banks are marketing not only well-known mutual funds, but their own brands of mutual funds, often trading on their reputation by giving the funds similar names and using promotional material that uses bank corporate colors and logos.

Consumer groups, Congress, and federal regulators are concerned that customer confusion is mounting. Often securities brokers sit in the same lobby, and sometimes, as in Wells's case, at the same desk once occupied by bank clerks.

``When they walk into the lobby of their hometown or neighborhood bank - which they trust and have done business with over the years - and they see that seal on the window that says `Insured by the FDIC,' customers are likely to believe that whatever transaction is going to take place there is backed up by the bank and insured by the federal government,'' says Sen. David Pryor (D-Ark.,) chairman of the Senate Special Committee on Aging.

By law, a bank teller or bank employee cannot sell securities without a license. But it is common industry practice to give a cash bonus to bank employees if they refer customers to the securities broker in the lobby. That broker, in turn, generally earns significantly higher commissions by selling the bank's own proprietary mutual funds.

When interest rates are low, the elderly living off investment income can become targets. ``The banks have recognized that these people are desperate and can be easily lured out of their insured, secure investment with the promise of a higher current income,'' says Laura Park, a former broker at First Union Brokerage Services in Tallahassee, Fla., during a congressional hearing held by Senator Pryor last month.

Also, the brokers - either employed by the bank or by a brokerage firm contracted by the bank - may know about clients' finances before they walk in the lobby. When government-insured CDs mature, it's common practice for banks to give the CD holder's name to the securities broker to make a sales pitch.

Regulators' turf battle

This ``gaping consumer-protection hole,'' as one state regulator calls it, continues because federal regulators are locked in a turf battle over who is going to police bank brokers. ``The Office of the Comptroller of the Currency [OCC] has the authority over the banks, but it's relatively unexercised,'' says Chris Lewis, the Consumer Federation of America's bank policy director. The Securities and Exchange Commission has the power to regulate securities but not when the bank sets up its own brokerage firm. And, Lewis says, ``the banks don't want the SEC involved.''

A year ago, two bills to set guidelines for selling securities in banks were introduced in Congress but never got off the ground. In February, the OCC issued new, stricter guidelines for banks and bank examiners. The OCC also conducted a survey of securities marketing material from 700 national banks this year. Based on the survey, the OCC told banks last month that more disclosure and clarity is needed. ``I disagree with the assertion that we've not been doing enough. We've initiated quite a lot this year,'' says OCC spokeswoman Janice Smith.

Many banks are policing their brokers closely now. An August survey of the 50 largest US banks selling securities shows improvement. Only 1 in 5 banks failed to mention that the securities products were not government-insured. The ratio was 1 in 3 banks in a March survey, according to Prophet, the San Francisco-based market research firm that conducted the surveys. ``The banks are all over the board. Some are doing a great job, others do an awful job,'' says Scott Galloway of Prophet. NationsBank ranked among the three best in the survey. But out of the 50 institutions, 42 had at least one sales broker who, Galloway says, ``put the parent bank and prospect at risk due to compliance violations.''

Denise Crawford, chairwoman of the bank securities activities committee of North American Securities Administrators Association in Austin, Texas, says she's ``pleased'' with the signs of improvement. But she's concerned that ``the situation has not been fully addressed.'' She notes that hundreds of small community banks are following the bigger banks into the mutual fund business. She says she worries that these firms may have fewer resources to train and police brokers. ``People aren't as skeptical when the go into the First National Bank of their hometown, where they've done business for 30 years. That makes them easy marks,'' she says.

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