Branch Staff Allegedly Got Improper Bonuses
NationsBank Corp. has come under fire for an alleged practice, said to have been abandoned in January, of paying hefty cash bonuses to branch employees who referred business to its brokerage affiliate.
Two pending lawsuits charge that the Noah Carolina-based company violated banking and securities rules by paying a 5% share of brokerage commissions to branch employees.
The practice was confirmed by a current employee of the brokerage affiliate, NationsSecurities, who asked not to be named. The company is a joint venture of NationsBank's lead banking unit and Dean Witter, Discover & Co.
A NationsBank spokesman declined to comment on the incentives, which were disclosed in an arbitration claim filed against NationsSecurities last month by 18 brokers.
Similar disclosures also were made in a separate suit by three other brokers.
But the spokesman, Ellison Clary, reiterated statements the bank has made over the past month that NationsSecurities abides by both "the spirit and the letter" of banking and securities regulations.
The statements came in response to suits by a handful of former brokers and customers claiming that NationsSecurities is systematically misleading customers about investments.
Several brokers not involved in the suits have taken exception to the claim that customers are misled, as has the bank, which vigorously denies the charge.
But the brokers were in consensus in describing the incentive program. If it existed, it would appear to belie the claim that NationsSecurities was in full compliance with the rules.
"Banks in general are being very careful not to cross any lines," said Glen Casey, a consultant with Cerulli Associates in Boston, which advises banks about marketing investments.
"This case with Nations is a bit surprising if, in fact, the allegations are true."
According to the arbitration claim for the 18 brokers, Nationsbank had adopted the commission-sharing arrangement before the formation of NationsSecurities in 1992.
In the program, tellers and customer service reps were taught to identify and refer prospects to branch-based brokers. The suit said that one unnamed branch employee in Texas got a $3,000 bonus for a referral that resulted in a $1.5 million investment. Another branch employee was said to have gotten more than $2,000 from a referral that resulted in a $1 million transaction.
In January, the bank changed the payout to a flat $10 fee for referrals that led to sales.
Since last year, federal banking guidelines have barred banks from paying branch employees bonuses that are contingent upon the sales of investments.
Instead, bonuses can be paid only for referrals, whether or not a sale is made. These rules are intended to help separate a bank's traditional business from its brokerage business. They are also meant to keep unqualified people from selling investments.
Likewise, the National Association of Securities Dealers prohibits brokers from splitting commissions with people who don't have securities licenses. So do rules in some states in which NationsBank operates, including Florida, Georgia, North Carolina, and Virginia, according to the arbitration claim.
The suit said that NationsBank alluded to these concerns in a memo it distributed that listed two reasons for dropping the arrangement.
One was that the plan didn't compensate employees for meeting "sales objectives."
The other was that "OCC and NASD regulations" say such incentives must "be nominal and have no bearing on commissions generated."
Robert F. Miailovich, a senior regulator at the Federal Deposit Insurance Corp., said that if a bank was sharing commissions, regulators would likely ask it to change the practice. If the bank changed, it would likely face no further sanctions.
He could not say if any such discussions had been held with NationsBank. A Securities and Exchange Commission official who wished not to be identified said banks are excluded from the commission-sharing restrictions in the securities dealers group's rules. Shifting Gears NationsBank has changed theway it pays employees whorefer business to its brokers: Until January, thebranch employeesgot 5% of grosssales commissionsfor all referrals to abranch-based broker. Now, the employeesget $10 for eachreferral that resultsin a sale. Sources: NationsSecuritiesemployees, legal filings,
