NASD: Worthen Case Not Meant to Signal A Wider Crackdown

securities regulators said they were punishing an institution that flagrantly disregarded risk disclosure regulations. But those same regulators argued that this case doesn't necessarily indicate a broader move against banks' brokerages. "I wouldn't say it's part of a trend," said John Pinto, executive vice president for regulation of the National Association of Securities Dealers. "But it's a prime example of the kind of conduct that we're concerned about." On Tuesday, the NASD announced fines totaling $258,400 against the brokerage unit of Worthen Bank and Trust and the unit's former president, Patrick D. Miller, a former compliance officer, Frank M. McGibbony, and seven sales representatives. The penalties stemmed from findings that the unit misled customers about the risks of mutual fund investing. A NASD official said the fines represent one of the harshest actions the organization has ever taken against a bank brokerage unit. Worthen was recently acquired by Boatmen's Bancshares, St. Louis, and the banking company cooperated with the investigation, NASD officials said. The action - coming as most bank brokerages have made a concerted effort to improve their methods for disclosing the risks of mutual funds and other investments - signals that past missteps by banks will not be forgiven. NASD said that the investigation against Worthen, which stemmed from customer complaints between 1992 and 1994, revealed written and oral presentations that could lead a customer to believe mutual funds were just as safe as traditional bank products. The misdeeds were far-reaching, NASD executives said. "There were hundreds of customers involved and hundreds of pieces of correspondence," said Warren A. Butler Jr., a NASD vice president and district director. For instance, a Worthen sales representative allegedly hand-wrote at the bottom of a bond fund solicitation, "This issue is only being offered to a selected group of banks." The solicitation, released by the Arkansas Securities Department, also promised a full return of principal within 10 years. Arkansas officials turned the information over to NASD, which completed the investigation earlier this year. "This ought to warn banks that a lot of people out there are looking to make sure they do things right," said Brian W. Smith, who works with bank mutual funds as law partner at Mayer, Brown & Platt, Washington, D.C. The Comptroller of the Currency, which cooperated in the investigation, indicated it is also pursuing actions of its own against some of the brokerage executives. The alleged misrepresentations constituted "unsafe and unsound practices," the comptroller's office said in a written statement. A number of regulators and observers said that while dramatic, the alleged actions of Worthen do not necessarily represent the current state of bank brokerage compliance. "One would hope that after February 1994, when banking regulators came out with clear guidance in their interagency statement, that bank- affiliated brokers have become aware and have conformed." said Melanie Fein, an attorney with Arnold & Porter, Washington, D.C.