In the past three years, bank brokerage subsidiaries have faced persistent criticism-and the occasional lawsuit-over the disclosure of the risk of transferring money from federally insured deposits into securities.

Although banks have been dealing with the legal fallout from their push into investment sales for some time, two recent rulings involving NationsBank Corp. have brought the issue back into the limelight.

On May 20, Florida's Department of Banking and Finance, detailed a settlement in which the Charlotte, N.C., banking company's NationsSecurities unit would pay $850,000 in fines related to customer complaints about derivatives losses.

One week earlier, a panel acting on behalf of the National Association of Securities Dealers ruled that NationsSecurities sales practices "were less than adequate to meet industry standards," though it stopped short of making an award to three whistle blowers.

With these developments still making headlines, American Banker asked several executives: "What lessons have banks gleaned from the past three years of legal challenges to their brokerage sales practices?"

Bank brokerage executives wouldn't touch the issue, but two lawyers and a trade association official weighed in.

Jonathan L. Alpert

Plaintiffs' attorney, Alpert, Baker & Calcutt


NationsBank has completely changed its program. It doesn't do what it did three years ago. ... (Now) there are no packaged products, no sales pressure, and no brokers preying on people in lobbies.

Changes (in the industry) are at least an indirect result of lawsuits and regulatory action. The industry has learned that selling securities ain't as easy as it looks.

There's a utilization of trust, confidence, stability in the government- supported banking system to lure customers.

With the exception of the bond market downturn in 1994, the stock market is on a steady advance-and that's one of the things that bothers me. In a catastrophe, even the best (bank securities) programs are going to get caught in losses. ...

There are some real safety-and-soundness issues. The attitude of too many in the industry has been to ignore the message of plaintiffs.

Joe Belew

President, Consumer Bankers Association


Banks have taken compliance more seriously. (Selling investments) is a relatively new business. You get your sales and training house in order with the passage of time.

A banker I know-and I understand this is widespread practice-ties compensation to compliance, so if you foul up, your bonus is cut.

Banks are mystery shopping. You hire someone posing as a customer who goes in and through the sales process and rates your employees. It can be used for compliance and sales practices, and those two travel together.

Banks have also learned that the public is in a mood to sue, sometime without much justification. I know of a number of cases where banks bent over backward to protect customers and still lost in civil suits.

A lot of these cases go to arbitration and banks are vindicated-those just don't make the headlines. When the market goes south, people will say you didn't tell them. It's just banks experiencing the same sort of, in some cases, harassment that Wall Street firms have always enjoyed.

You've got disclosures out the wazoo. You've got graphic disclosures that say "this is not insured by the bank; you could lose money." You've got oral disclosures and widespread understanding about that basic fact in the public.

So banks are coming from a very strong position and have made a lot of progress in a short period of time. They weren't selling mutual funds. This has all happened in a historical nanosecond. Go back five years and banks were pining to sell what the consumer wanted. They have done a remarkably good job in informing the customers. That comes from a business recognition that they've got to be very straightforward with their good customers.

John P.C. Duncan

Partner and head of banking practice, Jones, Day, Reavis & Pogue


They've learned that you have to be like Caesar's wife: above suspicion.

Burdens on banks are greater than on other people, such as giving this Miranda rights-like disclaimer of "this is not an insured investment product." When brokerage firms sell investment products they don't have to tell them it's not insured.

Here is a lesson. I hope banks have learned that they should not sacrifice their relationship banking for the sales culture.

Banks tend to give up their cultural assets in exchange for potential future assets. They gave up their relationship culture and just have a sales culture. Maybe what they need is a sales-informed culture, rather than compromising a relationship culture for a sales one.

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