In a move that could help banks compete with their nonbank rivals, the Securities and Exchange Commission has signed off on a plan by Firstar Corp. to reward mutual fund and brokerage customers with preferred banking services.
The SEC, in an April 11 letter, blessed Firstar's plan to give retail securities customers a broad array of bank perks - ranging from free checking to discounts on mortgage closing costs - based, in whole or in part, on their assets in the bank's proprietary mutual funds or in brokerage accounts.
It is the first time that the SEC has approved the idea of rewarding securities customers with bank services.
"It represents a significant step by the SEC because they had denied no- action relief earlier for other types of packaging arrangements, such as discount travel coupons for purchasers of mutual fund shares," said Melanie Fein, a partner at Arnold & Porter, a Washington law firm.
The SEC's position falls in line with the Federal Reserve Board's easing last year of anti-tying rules that generally prevent banks from linking discounts on one product to purchases of another. Taken together, these two moves defuse any doubts bankers may have had about rewarding their top securities customers with bank bonuses.
"The facts that Firstar provided are general enough that anyone who has a preferred customer program could rely on this (SEC) letter," said W. John McGuire, a lawyer at Morgan, Lewis & Bockius in Washington.
By linking bank service bonuses to customers' securities business, banks can now make a stronger claim as customers' logical choice for one-stop financial shopping.
"This helps us remain competitive with the Schwabs of the world who offer bank-like products in combination with brokerage accounts," said Kenneth A. Aschom, senior vice president of Firstar's Illinois banking subsidiary. "We also think it puts us at the front of the pack on the banking side."
Beginning later this quarter, Milwaukee-based Firstar will start counting assets in proprietary mutual funds, outside funds, and other securities toward the customer's bank relationship.
Already almost half of Firstar's 400,000 checking account customers qualify for relationship pricing, a spokeswoman said. As a result of the SEC's ruling, roughly $1.5 billion in securities assets can now be counted toward qualification levels for preferred bank services, she said.
Firstar, however, has yet to decide whether securities will weigh as heavily as deposits or loan relationships in qualifying for elite bank service awards.
Other bankers say they see the appeal of programs like Firstar's, but have largely avoided them because of the murky regulatory picture.
"It's a natural tie-in for banks, but there's been a resistance from a regulatory standpoint," said R. Gregory Knopf, managing director of Union Bank of California's proprietary funds.
But now, SEC officials said banks can proceed on the same path as Firstar without a threat of enforcement action. The Firstar letter, they said, draws on previous precedent.
"We sensed there was a fair amount of interest and a degree of confusion from earlier letters, so we took the opportunity to look at prior positions and pull them all together in one place," said Jack W. Murphy, the SEC's chief counsel in the division of investment management.
"You've got a benefit that's not directly related to the sale of fund shares and that is a reduction of a fee that an investor would otherwise pay to the bank," Mr. Murphy said.
The developments promise lower fees for consumers and a further integration of securities services with traditional banking services.
"It's beneficial to consumers because they get more bang for their buck, and to banks that want to provide full financial services to their customers," said Sarah A. Miller, senior government relations counsel at the American Bankers Association, Washington.
Firstar is moving one step closer to offering customers compelling reasons to bring all their financial business to the bank, observers said.
"It's a significant positive move and ... reflects the increased role of banks in delivering financial products," said Barry G. Knight, vice president for bank sales at Pioneer Mutual Funds, Boston.
"It will further encourage bank customers to do their securities activities where they do their banking."
