John Pinto isn't exactly popular with bankers these days. Mr. Pinto is architect of the National Association of Securities Dealers' controversial plan to regulate bank broker-dealers. The plan, unveiled in December, has been blasted by bankers as a prime example of regulatory overkill. For his part, Mr. Pinto - the NASD's executive vice president for regulation - vigorously defends the proposed rules. Bank regulators, he maintains, lack the authority to regulate broker- dealers adequately. By filling this regulatory gap, the NASD is simply fulfilling its mission of safeguarding customers, he said. Mr. Pinto, 51, is a 26-year veteran of the Washington-based NASD, a trade group that sets professional standards for broker-dealers. He oversees a staff of 850 - more than one-third of the NASD's work force - and his domain includes advertising, compliance, market surveillance, and enforcement. Mr. Pinto said he expects the bank broker-dealer rules to be adopted this fall, after a public comment period and review by the Securities and Exchange Commission. He elaborated on his views in a recent interview with American Banker.
Q.: Bank regulators say they are doing just fine in policing investment sales. So why is the NASD stepping into the picture?
PINTO: We don't view our proposed rules as duplicating bank regulators' guidelines. Instead, we view our efforts as complementing what they have done.
Bank regulators created guidelines for banks themselves, but there are no rules that govern broker-dealers selling on bank premises. These broker- dealers include banks' own brokerages as well as nonaffiliated networking firms.
Q.: How do you respond to criticism that you are holding banks to a higher standard than other NASD members?
PINTO: Yes, we are. When a customer deals with a brokerage in a bank, that brokerage has a higher responsibility to ensure the customer understands they are doing something different than they have with savings accounts or certificates of deposit.
Customers must understand they are not dealing with the bank but a separate entity, and that they are investing in securities that are subject to risk and not protected by FDIC insurance.
Q.: Have you received many complaints about bank brokers?
PINTO: We haven't gotten a tremendous influx of complaints. But feedback from the SEC and from bank regulators' mystery shopping programs indicates the probability of customer confusion.
Q.: What kind of teeth would the NASD rules have?
PINTO: We would enforce these rules as we would any others and bring disciplinary actions if we find the NASD member doesn't comply.
If there is a finding of violation, NASD business conduct committees can seek censure, monetary fines, restitution, or suspension of the individual or firm involved.
In the most egregious cases, the committee can order an expulsion of the firm from NASD membership or the barring of an individual.
Q.: How have bank regulators reacted to the proposed rules?
PINTO: We met with representatives of all four bank regulatory agencies, and they gave us some helpful insight.
There are fairly significant similarities between the bank guidelines and our rules, but there are also differences. One area is referral fees. The bank guidelines do not prohibit NASD members from paying referral fees to bank employees. Our rules do not allow that.
Does that mean the bank can't pay referral fees? No, it does not.
Q.: Where else do you differ with bank regulators?
PINTO: We don't prohibit the use of general customer lists. But we felt it inappropriate for a bank to provide a list of customers and the amount of their maturing CDs. Some bank regulators agree; others don't.
Q.: How should bankers interpret the NASD's recent notice prohibiting the use of bank logos on brokerage materials?
PINTO: That notice was not as clear as it could be, and we're working on a clarification. The bank logo may be used along with the name of the bank. But it must not be used in a way that would mislead investors into believing they are dealing with the bank as opposed to the broker-dealer.
