The Securities and Exchange Commission has reprimanded Meridian Bancorp's investment subsidiary on grounds that it failed to disclose a conflict of interest in managing two employee benefit plans.

The unusual disciplinary action, in the form of a cease-and-desist order that was made public last week, spotlights the kinds of conflicts commercial banks can be exposed to as they push into money management.

Banks appear to be paying closer attention to conflicts that can arise on the money management front, both in the quest to attract fresh assets for investment subsidiaries and in their role as lenders.

Signet Banking Corp.'s money management arm, for instance, recently disclosed to mutual fund investors that it may occasionally invest in companies that also borrow from an affiliated bank.

At issue in the Meridian case is a $4 million investment made in 1989 by Meridian Investment Co., a subsidiary of the Reading, Pa., banking company. The unit oversees $5.2 billion of assets.

The SEC found that Meridian Investment had improperly used employee benefit assets to fund construction of a marina after the project's developer pledged to help the investment firm snare a lucrative state pension contract.

In its cease-and-desist order, the SEC said Meridian Investment "failed to disclose its economic self-interest in the (marina) investment" and that two senior executives failed to pinpoint the conflict and bring it to the firm's attention.

The SEC concluded that the investment unit had violated anti-fraud provisions of the Investment Advisers Act of 1940 for failing to disclose its financial interest. The agency ordered the firm to cease the violation and to take steps to avoid similar problems in the future.

Meridian Investment and two senior executives who were named in the SEC complaint consented to the order without admitting or denying the charges. The company declined to make the executives, president Philip H. Brown 2d and senior investment manager Craig A. Moyer, available for comment.

In a statement prepared for American Banker, Meridian Bancorp said it had voluntarily brought the matter to the attention of the SEC and the Federal Bureau of Investigation after an internal investigation in November 1990.

Meridian said it had cooperated fully in these investigations and in a federal grand jury probe that led to the indictment and conviction on bank bribery charges of K. Lawrence Neill, a former vice president of Meridian Investment Co.

Industry experts said it is quite rare for bank money management units to be accused of trying to exploit fiduciary relationships.

"Banks usually have appropriate safeguards in place" to ensure that they place their responsibilities to clients above any other consideration, said Brian W. Smith, a law partner in the Washington office of Mayer, Brown & Platt.

Charles Horn, a partner in the same firm, said banks that neglect their fiduciary duties are certain to encounter heightened regulatory scrutiny. They could also lose clients, he said.

Meridian Investment was specifically directed by the SEC to disclose the cease-and-desist order to all its clients.

An executive who oversees his company's employee benefit plan said he would be alarmed to learn that its pension administrator - a New York bank - had been disciplined for a conflict of interest.

"I'd cancel them. There's no excuse for that," said Harvey Camil, chief financial officer at Nature's Bounty, a Bohemia, N.Y., vitamin company whose pension plan covers 1,200 employees.

As part of the cease-and-desist order, Meridian Investment agreed to hire a consultant to review its policies and procedures.

The consultant's recommendations, which are expected this summer, "should only enhance the already high level of confidence our clients have in the integrity of our services," Meridian said in its prepared statement.

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