With the Federal Reserve Board's recent announcement that it is eliminating three section 20 firewalls, banks are likely to begin consolidating some operations to offer insured and uninsured investment products through the same employees.

However, although integrating the product offerings makes sense from a business point of view, banks have not yet addressed the risks of product delivery that must be mitigated before cross-selling can be accomplished.

The primary regulatory focus for all banks these days is "risk management." The greatest risk faced by a bank in the area of nondeposit investment products today is probably not the product risk - which the banks are capable of evaluating - but delivery risk.

Bankers and brokers simply do not speak the same language. As a result of the communications gap, the risks of noncompliance, including regulatory sanctions and investor class actions, are rising.

Before banks will be able to cross-sell bank and brokerage products, they need to focus on managing the delivery risk through cross-training the bankers and brokers.

Without an integrated approach aimed at easing tensions between the two groups and finding common ground, the compliance gap will widen at its most critical juncture - the delivery of investment products to the retail customer.

Product delivery problems have not yet become readily apparent, probably because of the continued bull market. But the Federal Deposit Insurance Corp.'s market survey of bank compliance with interagency statement disclosures showed that more than 30% of banks are still not providing customers with basic warnings about the difference between insured and uninsured products.

And there has been little market information published on the adequacy of bank brokerage suitability analyses for customers, although the Securities and Exchange Commission has cited the area as a problem for banks.

A decline in the bull market, however unlikely it may seem at present, is probable - and likely to precipitate further shareholder and regulatory scrutiny of bank sales of investment products.

The decline in the bond market in 1993 and 1995 preceded 160 complaints against seven banks in Florida alleging fraud in the delivery of uninsured investment products. The SEC is currently investigating bank sales of nondeposit investment products. According to a recent statement by William McLucas, SEC director of enforcement, SEC actions against the banks are likely to commence in January 1997.

Unfortunately, although the banks have improved their brokerage capabilities, primarily by hiring experts from the brokerage business to run their subsidiaries, senior management at many banks have done little to integrate such brokers into the banking operation.

There has been minimal focus on decreasing tensions between bankers and brokers selling on the same premises.

However, if the banks do exercise supervision and address the banker- broker gap through cross-training, bank efforts to cross-sell insured and uninsured investment products are likely to be far more successful from both a business and compliance perspective.

Ms. Striegel is a partner in the Washington law firm of Groom & Nordberg.

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