First Union Corp.'s aggressive marketing campaign for its bundled brokerage and banking account has hit a speed bump.
The Charlotte, N.C., banking company recently canceled a promotion for its Cap Account because of concerns that it did not square with investment regulations.
First Union mailings in July notified customers that if they shelled out $15,000 to open a Cap Account and invested a certain amount in the bank's proprietary Evergreen Keystone mutual funds, the bank would add $100 to the mutual fund investment.
A cash management account, First Union's Cap Account offers checking, brokerage, a daily sweep into a money market fund, discounted transaction fees, and a consolidated monthly statement.
Calls this week to the toll-free number included in the mailings showed that the $100 offer has been scrapped for "compliance" reasons. Instead, the company will waive two years' annual fees for customers responding to the promotion.
A First Union spokesman would not elaborate on the decision but said other promotions for the Cap Account were unchanged.
"We modified our promotion to address a technical regulatory issue," First Union said in a statement issued Tuesday.
First Union's decision to scrap the incentive came as the company is pushing hard to promote its investment products business. Most recently, it took out splashy advertisements in The New York Times and The Wall Street Journal touting its combination of banking and brokerage services. A television ad campaign has been running since February.
In the case of the scuttled promotion, the bank's zeal for growth may have clouded its judgment.
"I'm surprised the train got that far down the tracks," said Anne Moore, president of Synergistics Research Corp., an Atlanta retail investment products consultant.
It is not clear that any regulatory body-including the National Association of Securities Dealers, Internal Revenue Service, Office of the Comptroller of the Currency, or state regulators-instructed the bank to stop the promotion.
First Union may simply have had second thoughts after launching it.
But the company's decision to kill the promotion appears to have been wise; observers said it may well have broken the rules.
One possible conflict arises from the fact that Evergreen Keystone is a load fund and the $100 contribution could be viewed as a way to reduce the sales load by returning part of it to the customer, said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I. Such an arrangement violates an NASD rule, he said.
Another possible issue is that of a "preferential dividend." IRS regulations governing mutual funds dictate that all a fund's shareholders in the same class must receive the same dividend. Making the $100 contribution only to those with a Cap Account could violate that requirement, a legal expert said.
Mr. Bobroff interpreted First Union's scuttled promotion as an honest mistake by a banking company that has been marketing its Cap Account aggressively. The accounts had more than $18 billion of assets at the end of last year.
"I don't believe this is a serious indiscretion on the part of First Union," he said, "and the fact that they're pulling back from it or changing the (incentive) is a reflection of their desire not to push the edge of the envelope."
This is not the first time a financial services company has tripped over promotion protocol. Several years ago, Dreyfus offered to sell its clients a financial planning book at a discount price. The NASD cracked down and made the company end the promotion.
"Premiums as a concept is something that has always been a question in the marketplace," Mr. Bobroff said.