NASD Plan Seen Paralyzing Bank Brokerages

WASHINGTON - Bankers are worried that a rule proposed recently by the National Association of Securities Dealers will put a stranglehold on services offered by their brokerage affiliates.

The group's laundry list of restrictions on bank brokerage operations is open for comment until next week.

The industry's main argument is that the rule, which governs NASD- registered broker-dealers on bank, thrift, or credit union premises, would apply stricter limits to banks than to their competitors.

"This rule would discriminate against banks - that's what it's designed to do," James Shelton, president of the Bank Securities Association, said in an interview.

The wide-ranging proposal requires physical separation of bank brokerage and deposit activities, forbids the brokerage unit to pay referral fees to unregistered bank employees, limits cross-marketing to customers, and demands written acknowledgement that customers have read disclosures.

The NASD, which has said it wants to reduce customer confusion, would turn many of the recommendations issued by the four banking agencies last year into requirements.

Under the rule, NASD and the Securities and Exchange Commission would be allowed to examine banks for compliance.

Here's what banks will have to do if the rule is adopted as proposed:

*Brokerage sales would have to be physically separate from deposit taking. A sign identifying the area and showing the name of the broker would have to be posted. No broker signs would be allowed in deposit-taking areas.

Small banks have complained that it would be extremely difficult for them to find room for a separate brokerage area.

*Unregistered bank employees would be barred from earning referral fees from a bank brokerage affiliate or recommending securities to customers.

Banks may compensate those employees as long as the fee is not based on whether the sale is made.

By contrast, nonbank brokerages can pay referral fees to employees of an affiliated mortgage company.

*Brokers could not use the bank's confidential customer information for marketing. It is now a common practice for brokers to look for potential customers in those lists, such as people with maturing certificates of deposit. Many in the industry think that ban would be unfair to bank- affiliated brokerages because independent brokers can solicit customers who have deposit-like investments.

*Only the broker could communicate with investment customers. Because the broker would have to send account statements, it would prevent banks from offering customers a single statement that would list both deposit and investment activity.

*Numerous disclosures to customers would be required, including that the securities are not backed by the Federal Deposit Insurance Corp., that they are not guaranteed by the bank, that they involve risk, including possible loss of principal, and that they are not insured by the Securities Investors Protection Corp. Most banks already disclose this information.

*Customers would have to sign an acknowledgement that they have read the disclosures. Because the response must be written, this could inhibit telephone or mail sales.

Banks also would have to overhaul their advertising programs.

Any ads for brokerage services would have to be approved by the broker, and NASD would be able to review ads as well.

Banks could be mentioned only in a "nonprominent manner" in an ad, solely to show the location of the broker services.

Ads would have to say that the services are being provided by the broker, not the bank. They would have to state that the bank is not a registered broker and whether the broker is affiliated with the bank or not.

Although the bank and the broker could place joint ads, descriptions of products would have to be clearly separated.

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