The National Association of Securities Dealers got plenty of responses from banks when it recently sought public comment on its plan to regulate bank-affiliated brokerages. But a handful of nonbank companies weighed in with views, too.
Among them was A.G. Edwards & Sons Inc., a St. Louis-based brokerage firm that many banks view as a fierce rival. Following are excerpts from the firm's four-page letter of comment, written by Brian C. Underwood.
The increase of bank-brokerage sales and the issues pertaining to bank activity in nondeposit investment sales are important to the entire industry, particularly the issue of customer confusion.
We support the proposed rule as a significant step toward eliminating such problems. However, we respectfully request the NASD consider expanding the guidelines to include other safeguards.
We agree that requiring brokerage services to be offered in a physically distinct area away from a deposit-taking area of a financial institution is an important step in minimizing customer confusion. However, we believe that there are other measures that can be implemented that will further minimize the potential for confusion.
In our view, member firms that conduct business on the premises of a financial institution should be required to have their own phone lines. Too often, a call is passed from the financial institution to the broker-dealer without clearly identifying that the broker-dealer is a separate entity.
The NASD should consider prohibiting an individual from being employed by a financial institution and a broker-dealer. We question whether an investor transacting securities and bank business through a dual employee will understand the distinction between a bank product and a securities product even though the products are sold in different areas.
Many bank-affiliated broker-dealers have similar names and use similar logos as those of the affiliated financial institution. This causes a great deal of confusion among the public as to whether the broker-dealer is actually a separate entity.
The Securities and Exchange Commission recognized this problem and restricted bank-sponsored mutual funds from being similarly named as the financial institution. We agree with the decision of the SEC and support a similar action by the NASD for bank-affiliated broker-dealers.
Under the proposed rule, signage promoting brokerage services available through the financial institution will not be permitted in the deposit- taking area of the financial institution. The proposal leaves too much room for discretion on the part of the broker-dealer as to where it can advertise its services.
Therefore, we ask that the NASD define what is a deposit-taking area in the rule, including, at a minimum, teller areas, new accounts departments, drive-through facilities, and automated teller machines.
Although the rule prohibits compensation to unregistered employees, it does not address whether a member firm can directly compensate an unregistered financial institution for securities transactions, and, if permitted, what form the compensation could take.
In our view, the intent of the rule is to prohibit a member firm from paying compensation to an unregistered person or firm. Therefore, the final rule should also prohibit payments to unregistered financial institutions.