NationsBank Corp. has closed the book on allegations that its broker-dealer arm misled investors about the risks of certain mutual funds in 1993 and 1994, agreeing Monday to pay nearly $7 million in regulatory fines to settle the matter.
NationsBank neither admitted nor denied wrongdoing in the case, which was brought jointly by the Securities and Exchange Commission, the National Association of Securities Dealers, and the Office of the Comptroller of the Currency. "We want to put this issue behind us," said NationsBank spokeswoman Ann Anderson.
The settlement, which culminated several years of similar actions at the state level, marked the first time that the SEC has disciplined a commercial banking company for engaging in deceptive and misleading sales of securities on bank premises. In the past three years, NationsBank has agreed to pay $31 million to settle lawsuits and charges brought by state regulators.
Regulators said the hefty penalty demonstrates that banks will be hit hard if they dupe customers.
"We will not tolerate deceptive practices that prey on investors," SEC Chairman Arthur Levitt said at a press conference.
News of the settlement added more fuel to the debate over financial reform legislation, with supporters claiming it shows bank regulators do not do enough to protect investors.
Under the settlement, NationsBank's broker-dealer, NationsSecurities Inc., must pay $4 million to the SEC and $2 million to the National Association of Securities Dealers. NationsBank N.A., the Charlotte, N.C.- based company's lead bank, must pay $750,000 to its regulator, the Office of the Comptroller of the Currency. That's one of the largest fines ever levied by the OCC.
The allegations stem from the sale of $300 million in high-risk bond funds during 1993 and 1994 by NationsSecurities. According to federal regulators and the NASD, NationsSecurities brokers misled customers by telling them the funds were as "safe as CDs," even though the funds invested in derivatives that were sensitive to interest rate risk.
The brokers allegedly also targeted inappropriate customers; more than 65% of the shares were sold to elderly customers, many on fixed incomes. Regulators also charged that NationsBank violated anti-tying rules by paying commissions to bank employees when their referrals resulted in a sale of the fund's shares.
The financial reform legislation scheduled for a vote in the House Thursday would give the SEC and state insurance regulators more authority over banks. The SEC has endorsed the bill while the Treasury Department, including the Comptroller's Office, opposes the measure.
At the press conference, SEC Chairman Arthur Levitt Jr. said the NationsBank case demonstrates the need to place all securities sales under the jurisdiction of the SEC.
Rep. John Dingell, D-Mich., an outspoken advocate of tougher controls on banks, agreed. The Comptroller's Office "identified these fraudulent sales practices while conducting routine examinations in 1994 and 1995, yet did nothing to stop them," he said in written statement. "Only after the SEC presented its findings did the OCC act."
But acting Comptroller Julie L. Williams said the agency acted "immediately" when the violations were discovered in 1994. Appearing with Mr. Levitt at the press conference, she said regulators already have the necessary tools to combat improper sales practices and the case should have no bearing on this week's vote. "Each regulator did its job according to its expertise and responsibilities," she said.
Ms. Williams stressed that NationsBank has cleaned up its investment sales practices. "We do not have any current issues with NationsBank," she said.
But Jonathan Alpert, a Tampa plaintiffs' attorney who brought the charges to regulators' attention and filed the original class action against NationsBank, said the industry must still clean up its act.
"Many are banks are better at informing customers about the risks of nondeposit products, but the situation is still fraught with peril for bank consumers," he said.