Banks are coming under renewed pressure to refrain from selling their own mutual funds more aggressively than those run by other companies.
The National Association of Securities Dealers late last month ordered First Union Corp. to pay $727,000 to a former bank broker who said she had been fired over the issue. The broker said she was dismissed for refusing to train others to focus heavily on selling the bank's own funds.
Tuesday afternoon the NASD was scheduled to hear a similar complaint from three former brokers of NationsBank Corp. The NASD was not expected to take any immediate action.
Though the charge that banks push their own funds too hard is not entirely new, the involvement of the NASD clearly intensifies the debate, observers said.
Critics contend that banks, eager to build the assets in their proprietary funds, are at times steering consumers away from other funds that might be more suitable investments. Most banks with proprietary funds also offer at least some funds managed by other companies, such as Fidelity Investments and Putnam Investments.
"Banks are under pressure to grow the assets in their proprietary funds because they haven't been growing generally," said Geoffrey Bobroff, a consultant in East Greenwhich, R.I.
Mr. Bobroff added that the management fees banks earn when they sell their own funds top the commissions for selling someone else's.
At First Union, former broker Laura Park was fired in June 1994 from a job training brokers and branch employees to sell mutual funds and other investment products.
Her lawyer, Jonathan Alpert of Tampa, Fla., said she had complained to management that the training she was told to give "was improper because it focused too exclusively on proprietary products and not enough on suitability."
Ms. Park won her case before an arbitration panel at the NASD, the securities industry's self-regulating body.
First Union denies the charges, and plans a court appeal, said a bank spokeswoman. The bank says it fired Ms. Park for violating NASD rules by using unlicensed bank employees to sell investments.
Dwight Moody, president of First Union Brokerage Services Inc., said in a prepared statement that the NASD decision could cripple a bank's efforts to control its brokerage staff.
"We're concerned about the impact this decision can have on our ability to take disciplinary action against an employee after we have identified a compliance problem," Mr. Moody said.
The decision, he asserted, "could tie our hands and subject us to second-guessing of termination decisions made in response to compliance violations."
As First Union prepares to appeal, NationsBank is just beginning the hearing process at the NASD. Mr. Alpert, the lawyer for the former First Union broker, is also representing the three former brokers at NationsBank - David Cray, Katherine Hovis and Robert Lewis.
Mr. Alpert alleges that Mr. Cray was fired and the other two were "forced out" after they complained that NationsBank had pressured them to emphasize sales of the two unit investment trusts and a bond fund managed by the bank.
"They were forced to sell proprietary products to their customers," Mr. Alpert said. "When they blew the whistle they were punished."
Mr. Alpert said the brokers were also told not to reveal that the bond fund invested in derivatives.
The brokers also complained, Mr. Alpert said, the bank was misleading customers that the unit investment trusts were insured by the Federal Deposit Insurance Corp.
A NationsBank spokesperson said the company will not comment on the case.