An agreement by BankBoston Corp. to tighten mutual fund sales practices in the wake of a regulatory probe underscores the need for banks to focus on investor suitability.
The agreement was confirmed Friday by the banking company and the Massachusetts Securities Division, and it ended a seven-month inquiry. BankBoston neither admitted nor denied wrongdoing.
The agency had been investigating whether brokers at BankBoston Investor Services encouraged customers to make unsuitable investments. Specifically, Massachusetts regulators said they were concerned that brokers improperly pushed customers who owned no-load funds to switch into funds that charged sales fees.
Brokerages are required to match investment products with a customer's needs, thus providing a suitable investment opportunity. Though this procedure is followed as a matter of course when an account is opened, it is just as important in follow-up sales.
"I think the suitability wears down on subsequent trades," said W. Christopher Maxwell, a consultant based in Rock Hall, Md., and a former bank proprietary fund executive. The "better brokerages" are looking at every trade, he said.
Matthew Nestor, director of the securities division, said he ended the BankBoston inquiry because he was confident that the company "has put into place additional procedures to ensure investor protection."
The brokerage volunteered to enhance policies and procedures to safeguard investors, a BankBoston spokesman said.
The company also agreed to monitor transactions that involve switching customers among mutual funds, hire an auditor to review the transactions for two years, and cover the $22,000 expense of the inquiry.
Meanwhile, BankBoston Investor Services said it plans to continue an expansion that was under way before last week's resolution. The brokerage plans to double its Series 7 broker sales force, to 100, by yearend, said Catherine Thornton, director of sales for investment products and services. There are "several ready to join us" from other bank-affiliated brokerages or wire houses, she said.
And for the first time, BankBoston will have branch bankers with Series 6 licenses selling funds.
But the brokerage unit has yet to fill the post vacated by Allen W. Croessmann, founder of both the brokerage and its 1784 Funds. He resigned in August, shortly after the inquiry began. Both the company and Mr. Croessmann said the events were unrelated.
Mr. Croessmann said he wanted to take time off after six years of commuting weekly from his home in New Jersey. The company is continuing to look for his successor.
BankBoston sells 18 proprietary no-load funds and seven other fund families: Colonial, Eaton Vance, Fidelity Advisors, John Hancock, Massachusetts Financial Services, OppenheimerFunds, and Putnam Investments.
The proprietary funds were more popular last year for short-term investments, which make up almost two-thirds of the asset total. BankBoston's 1784 money market funds had net inflows of $1.6 billion, according to Financial Research Corp. in Boston.
Long-term funds-equity, fixed income, and municipal bond portfolios-had net outflows of $36 million. Nevertheless, assets under management in the 1784 Funds increased 23%, to $9.3 billion, at Dec. 31.
