NationsBank's venture into the brokerage business with Dean Witter, Discover & Co. has drawn plenty of criticism in the past couple of months for allegedly deceptive practices.
Three suits by brokers, and another by three customers, claim the NationsSecurities brokerage systematically misled customers about the risk of investments.
The suits, which are pending, have been reported in several newspapers, including this one, and have prompted state and federal regulators to investigate.
They also promise to hurt NationsBank's business in the Vicinity of Tampa, Fla., where many of the complaints originated, and where local papers have aggressively covered the story, a senior bank official acknowledged privately.
But curiously, many of the complaints are about practices allowed under banking and securities rules, and commonly employed in the industry. So why the commotion? Simply put, NationsBank has been an aggressive marketer in a bear market. And, as newcomers to investment sales, banks are under extraordinary scrutiny. Just about any complaint by a disgruntled broker or investor can draw a national audience.
"People say, 'You're being too aggressive, buddy,'" said W. Christopher Maxwell, a Keycorp executive vice president in charge of the Cleveland company's mutual fund business.
"They say, 'I'm going to come after you because you must have been doing something wrong,' even if you didn't," he added.
NationsSecurities has repeatedly said it operated within the letter and spirit of banking and securities rules but has declined to comment on specific claims.
To be sure, some of the complaints are for practices that would have been improper if they occurred.
For example, three customers in Florida have claimed that NationsSecurities brokers improperly steered them from bank deposits into mutual funds that lost money. They said they were never told of the risk.
Similarly, until January, NationsBank was said to have given branch employees a cut of brokers' sales commissions. If this happened, it would appear to violate banking guidelines that have been in effect since the last half of last year.
But it is unclear that other alleged wrongdoing was, in fact, wrong.
For example, it is claimed that the NationsSecurities name is "deceptive and unreasonably similar to that of NationsBank's banks," The same was said of the NationsFunds mutual fund name and its red, white, and blue logo.
There were also complaints about incentive commissions paid to brokers for proprietary fund sales. Brokers were also said to have improperly obtained lists of bank customers for prospecting.
But these practices have been approved by regulators.
For example, the Office of the Comptroller of the Currency, in its letter approving the Nations-Securities venture, specifically approved the affiliate's name.
Regulators have also allowed soundalike names for banks' mutual funds.
Additionally, it is not uncommon for brokers to get higher commissions for selling their employer's mutual funds, compensation experts say. Regulators say the practice is allowed. Likewise, no federal rule bars bank-affiliated companies from calling on bank customers. A court ruling in Florida, which says some customer information is confidential, could, theoretically, give NationsBank some trouble, said Robert Ellis Smith, editor of Privacy Journal, Providence, R.I.
But since NationsBank owns half of NationsSecurities, it could reasonably argue that brokers were agents of the bank and entitled to the information, Mr. Smith said.
So why the heat?
Edward Furash, chairman of Furash & Co., a consulting firm in Washington, D.C., thinks one reason is banks' conservative reputation.
If a bank hustles investments as hard as most brokerage houses do, it is likely to make some people angry, especially when investors lose money, he said. There's also a political angle. Congress has been wrangling over which agencies should regulate banks' investment sales - banking regulators or the Securities and Exchange Commission.
Bureaucrats on both sides of the wall want to be seen as diligent in rooting out troubles to legitimize their jurisdictional claims.
"It's a tuff battle that puts banks in the middle and gives them a very high profile," Mr. Furash said.
