Dealing the final blow to its much-vaunted partnership with Liberty Financial Cos., Chemical Banking Corp. has formed a retail brokerage to manage sales of investment products in bank branches.

Liberty, a Boston-based financial services company, has operated the mutual fund and annuities sales program in Chemical's 300 New York-area branches since May 1993.

Two months earlier, the companies had announced plans to form a jointly owned brokerage, Chemical Investment Services.

A company of that name was launched as a unit of Liberty last May. But in a regulatory filing in January, Liberty revealed that Chemical was pulling the plug on plans for the joint venture. In the end, no jointly owned company was established.

Strategic About-Face

Chemical officials say they changed their plans after rethinking their overall strategy for retail securities sales.

Instead of sharing duties with an outside marketing company, Chemical has opted to consolidate several retail securities businesses in a new brokerage subsidiary that is wholly owned by its lead bank, Chemical Bank, New York.

"We've expanded the original mandate of the group," a Chemical spokeswoman said.

The new unit, which takes over the name of Chemical Investment Services, will assume the duties of the Liberty subsidiary as well as chunks of business that are now handled by Chemical's section 20 subsidiary, Chemical Securities Inc.

It will also house support operations that are now run out of New Jersey and Texas.

Executive to Remain on Board

Leonard E. Malkin, a Chemical executive who has served as managing director of Chemical Investment Services during its incarnation as a Liberty unit, will continue in that role.

Chemical Investment Services could be up and running by summer. Under the arrangement, the 127 sales representatives now employed in Chemical branches by Liberty will move onto the brokerage's payroll.

These representatives sold $288 million in mutual funds and annuities between May and December 1993, according to a regulatory filing by Liberty.

Last month, the New York State Banking Department approved the bank's plans to create and capitalize the brokerage.

Field Exam Required

Now the matter is pending before the National Association of Securities Dealers, which must conduct a field exam before the brokerage can begin operation, said Frank McAuliffe, NASD vice president for qualifications and membership.

By organizing its own retail brokerage, Chemical is assuming greater liability and more management responsibilities than it would have had under a joint venture.

But the bank is also positioning itself for greater profits, because it won't have to share commissions, analysts say.

"If you can generate the volume, you can bring more to your bottom line," said Edward Mungenast, president of Securities Consultants, Boca Raton, Fla.

Chemical is also gaining full control of the program, an arrangement that the bank's management and customers are likely to prefer, according to Mr. Mungenast.

"Customers will be more comfortable dealing directly with a bank unit, not an outside affiliate," he said.

The Chemical spokeswoman said the bank will continue to rely on Liberty as a consultant. Neither she nor Mr. Malkin would elaborate on what duties Liberty will be asked to handle.

Meanwhile, Chemical is hiring 13 new sales representatives, to bring its total to 140, the spokeswoman said.

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