NationsBank Corp. and First Union Corp. are abandoning a controversial practice of paying their brokers more for selling the banks, own mutual funds than for selling funds from other companies.

The payouts, which are the subject of litigation, are being stopped at yearend to mollify brokers and customers potentially disturbed by the practice, spokesmen for both Charlotte-based banking companies said.

In a related move, NationsBank has halted the expansion of its brokerage sales force, stopping one-third short of its previously announced goal of nearly one broker for every two branches.

Taken together, the changes mark a sharp turn toward more conservative tactics by two of the most aggressive banks in retail investment sales.

"If they've seen a necessity to shift practices, I think its pretty clear others will have to pay attention," said Kurt Cerulli, principal of investment marketing consultant Cerulli Associates Inc., Boston.

While hundreds of banks and thrifts want to expand their investment sales businesses, none has tried to do so as quickly as First Union and NationsBank.

First Union is halfway through plans to train two employees in every branch to sell mutual funds and annuities. These employees will supplement First Union's 200 full-service brokers and 75 personal trust officers, and constitute the largest branch-based investment sales force among banks.

NationsBank last year launched a retail brokerage joint venture with Dean Witter, Discover & Co. that had aimed by the end of this year to employ 900 full-service brokers for NationsBank's 1,900 branches. Previously, NationsBank had fewer than 200 brokers.

NationsBank and Dean Witter split up their venture earlier this month. As a result, Ellison Clary, a spokesman for NationsBank, said the company is halting the expansion at just over 600 brokers. The reason is for NationsBank to "get a feel" for how to run its retail brokerage on its own.

To be sure, the retail brokerage has taken its share of lumps lately. A handful of pending civil suits and arbitration claims alleging mismanagement have resulted in inquiries by regulators.

The banking, company denies the charges, and says the legal proceedings played no role in the recent changes in the unit.

Nonetheless, criticism did play a role in at least one of the changes. Mr. Clary said NationsBank was eliminating the incentive commissions because "we saw that arrangement was not popular with some of our account executives."

Privately some current and former brokers have complained that the incentives in effect penalize them for selling investments other than NationsBank's and Dean Witter's proprietary mutual funds - even if other investments are suitable for the customer.

Jonathan Alpert, a Tampa lawyer handling some of the suits, said that in some cases broker commissions are 50% higher for proprietary fund sales. The incentives were cited as one of many supposedly misleading sales tactics in his suits.

Mr. Alpert also has cited incentive commissions in one of two arbitration claims against First Union. The claims are on behalf of two former brokers who allege they were wrongfully dismissed after complaining of misleading sales tactics. First Union, like NationsBank, has denied wrong doing, and said the claims played no role in the commission changes.

But Jeep Bryant, a spokesman for First Union, said a spate of negative articles in local and national publications alleging misleading investment sales tactics at banks, including First Union, spurred First Union to change its commission structure.

"We wanted to make sure we eliminated even the perception that the commission structure would ever interfere with our desire to meet the customer's need in the best way possible," Mr. Bryant said.

First Union currently pays its brokers 40% of the sales load for sales of First Union's mutual funds, and 30% of the sales load for sales of other companies mutual funds. In the new system, the payout will be the same regardless of which mutual funds are sold. Mr. Bryant declined to detail what the payments will be.

Incentive commissions are used by many banks and brokerages, said Michael Garelik, a senior consultant in Towers Perrin's Chicago office.

But banks and brokerages are moving away from these incentives because of the fear of customer litigation, securities lawyers, and consultants said.

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