the spotlight. Florida regulators announced recently the broadening of an inquiry into complaints of misleading sales procedures. The state's inquiry stems from 166 consumer complaints received since June 1994 about mutual fund sales by seven bank broker-dealers including units of NationsBank Corp., Charlotte, N.C.; Barnett Banks, Jacksonville, Fla.; First Union Corp., Charlotte, N.C., and Great Western Financial Corp., Chatsworth, Calif. And earlier this week, the National Association of Securities Dealers levied a stiff fine against an Arkansas bank brokerage for misleading customers about mutual fund investment risks. But even with these recent black eyes, regulators and industry watchers say the actions are more of a regulatory backlash against past problems than a harbinger of things to come. Indeed, Arkansas Securities Commissioner Joe E. Madden Jr., who spearheaded the investigation that resulted in fines against Worthen Bank and Trust Co.'s brokerage unit and several top employees, said he believes that most banks in his state have made great strides in their securities sales practices. And Florida's stepped-up investigation appears to be an anomaly. Regulators in a variety of other states - including Texas, Arizona, and Colorado - report far fewer complaints from bank brokerage customers. What makes Florida different? Based on conversations with several regulators and industry watchers, several distinguishing factors emerge. For one, Florida has an unusually large elderly population. And it also has some of banking's most aggressive marketers, many of whom have pushed mutual funds with inadequate attention to disclosing their risks. Many first-time investors then bought bond funds just as the bond market began to slide. That confirmed the investors' worst fears about uninsured products. Finally, Florida's consumer-friendly laws and energetic plaintiff's bar may have encouraged disgruntled investors to seek legal recourse. While many of these factors played out in other states, their confluence in Florida led to a blossoming of customer complaints and regulatory interest. The central issue in Florida has been whether the banks adequately disclosed to consumers the risks to principal, lack of FDIC insurance, and fluctuation in value of mutual fund investments. In contrast to Florida, other state securities regulators say bank brokerages have made great strides in handling disclosure and that they account for far fewer customer complaints than their nonbank counterparts. "We don't feel like it's this major problem," said a securities regulator in a southeastern state who asked not to be identified. "We feel like the banks are now doing an adequate job." Regulators said banks have come a long way since their push to sell mutual funds captured the attention of regulators in 1993 and 1994. Since the late 1980s, the bank brokerage industry, fearing a regulatory backlash, has made risk disclosure a high priority. "The difference between then and now is striking," said Philip A. Feigin, Colorado's securities commissioner. "It is the rare bank investment ad that doesn't have an FDIC disclaimer." In Arizona - another state with a large proportion of elderly residents - complaints about banks' activities "constitute a small percentage of the oodles of complaints we see," said Dee R. Harris, director of the state's securities division. Mr. Harris, who recently became president of the North American Securities Administrators Association, estimated his office receives less than 10 consumer complaints a year about bank securities operations. In contrast, nonbank brokerages average one a day, he added. In Texas, bank brokerage units generated less than 40 complaints of 523 received in the fiscal year ended Aug. 31, said Denise Voigt Crawford, the state's securities commissioner. Regulators say banks have a special obligation to disclose risk to their customers because many of them are elderly and are stepping out of insured products, like certificates of deposit, into mutual funds for the first time. "We have a population that is the fourth highest in the country and has a high proportion of retirees," said Donald Saxon, director of Florida's Securities Division. "It just stands to reason that if there's going to be a problem that we would see it." The complaints under review in Florida were collected over 16 months and constitute less than one-sixth of the 1,000 securities complaints typically received per year, Mr. Saxon said. Florida law treats these complaints administratively, and Mr. Saxon declined to discuss specific actions under consideration. But the options range from taking no action at all to suspension of the units' activities. Although he refused to discuss the timing for regulatory action, he hinted that some cases would be concluded soon. "While we think we may getting close on some cases, you never know what you'll find the next day," Mr. Saxon said. "It's premature to determine how the cases will be resolved." Several banks named in the Florida probe have noted improvements. At Barnett Bank's brokerage unit, complaints have dropped dramatically. "Since June of this year we have had two complaints, and only a handful since the first of the year," said Jerri Franz, a Barnett Securities spokewoman. "Complaints make up less than 1% of customers system-wide," said Ellison Clary, spokesman for NationsBank Securities, Charlotte, N.C. "We have grown more and more diligent about our disclosure, but this is an evolving industry for banks to be involved in," and we continue to learn. Florida law allows recovery of triple damages in civil fraud cases - a rich reward that lawyers say may encourage unhappy investors to file complaints, arbitration claims, and lawsuits. "Customers are doing very well when they bring their claims in Florida," said Theodore G. Eppenstein, a New York-based plaintiff's attorney specializing in securities cases. Publicity surrounding investor lawsuits previously lodged against NationsBank and Great Western may have prompted additional complaints, lawyers said. "If there's some hope of recovering money, people will file complaints," said James M. Rockett, attorney at Ropes, Majeski, Kohn, Bentley, San Francisco. Many bankers have gotten the message about disclosure and seem to be recognizing the special needs of their clientele. "The banking industry does as good or better job than the traditional brokerage" in disclosing investment risk, said Edward R. Hipp, a brokerage industry veteran who six months ago became president of Centura Securities, a unit of Centura Banks, Rocky Mount, N.C. Centura Securities has had only one or two complaints this year, he said, and these concerned misunderstanding about sales loads, not disclosure. But Mr. Hipp said he is prodding his 82 brokers to prepare for an inevitable market correction - and its accompanying spurt of complaints - by emphasizing the risk from market fluctuations in customer discussions.
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