The Wells Fargo fiasco told us that retail account specialists are willing to cross the line in pursuit of their end-of-year bonus. But there is an equal if not greater concern with cross-selling: loan officers who also wear the hat of investment adviser.

Having a bank loan officer authorized to also cross-sell securities is like holding a burning candle at both ends; sooner or later the bank will get burned. The phony accounts scandal at Wells reminded management that for a retail employee, life can be more about cash flow than ethics.

When a bank or a commercial bank employee is also a registered representative for an affiliated or unaffiliated broker-dealer, he or she is referred to as a "dual-hat employee." These hybrid roles have systematically expanded throughout the banking sector as banks and their holding companies have strived to increase market share, deposits and profits.

Bank bonus programs often create incentives for commercial loan officers to secure investment deposits for the broker-dealer affiliate. This in turn creates a conflict of interest for dual-hat employees between their duties to the customer as a banker versus their duties as a registered representative. It is not hard to see the misalignment of motivations between the two roles. Whereas a creditor underwrites a borrower's financial health and monitors repayment, a financial adviser is subject to suitability requirements — and, as outlined in recent pending Labor Department rules, fiduciary obligations.

This apparent conflict of interest exposes the bank to claims of predatory banking practices, negligent supervision and portfolio mismanagement. These conflicts in turn are magnified by the economic power and weight of "too big to fail" conglomerates, which have a focus on the bottom line that inevitably leads to a corporate culture that will violate these ethical responsibilities.

That is, unless institutional regulators step up their game.

These inextricably intertwined customer duties find their origin in the Gramm-Leach-Bliley Act, which was signed by President Clinton in 1999 and repealed provisions of the Glass-Steagall Act of 1933. The 1999 law eliminated the regulatory wall between insurance, banking and the securities business. This not only enabled the merger of commercial and investment banking, but also motivated companies to link depository services with broker-dealer services, further blurring the line between traditional bank services and investment services.

To stem the tide of what resulted — one-stop financial retailers combining insurance, mutual funds, deposits and check services, and greater exposure for the FDIC safety net — a 2006 law passed by Congress required regulators to adopt rules governing the activity of bankers and broker-dealers. To further that law, the Financial Industry Regulatory Authority implemented a rule requiring both the clear identification of who provides broker-dealer services on a bank's premises and the segregation of the broker-dealer services from the retail deposit activities of the financial institution.

Likewise, the Office of the Comptroller of the Currency has chimed in on dual-hat employees. The OCC's Handbook on Retail Nondeposit Investment Products states, "A bank should ensure that RNDIP sales program policies and procedures address the suitability standard regardless of whether the sales are conducted by the bank directly or through a broker-dealer." The OCC further gave this prescient message concerning compensation in the sales of RNDIP: "Sales representatives engaged in improper sales practices may be focused on generating commissions without considering a client's investment profile and needs. … Other unsuitable tactics may include misrepresenting RNDIPs and misleading or pressuring clients."

However, such regulations and policy statements by FINRA and the OCC are only as good as their implementation and enforcement. This is where the regulators fall short, leaving bank customers exposed to predatory bank practices, potentially deceptive trade practices and unnecessary investment risk.

Commercial loan officers with a Series 7 license — the general accreditation for securities representatives — are being armed with a business card marked on one side as a commercial banker and on the other side as a financial adviser, a handful of promotional literature for both the bank and broker-dealer, and an incentive program that rewards them not only for booking commercial loans but also new assets under management for the broker-dealer.

Management has blurred the line with compensation programs for cross-selling by these dual-hat employees — where their ethical obligations under their FINRA securities licenses are deemed to be covered under the cloak of their loan officer designation. Their duties to their customers are potentially compromised by these conflicts of interest.

Research on investment literacy conducted by the Securities and Exchange Commission, in conjunction with the OCC, indicates that customer confusion originating from this dual-hat employee status extends across the financial product "distribution channels."

Is a commercial banker prepared to disclose that a mutual fund of the affiliate is not FDIC-insured when making a play to secure the customer's investment portfolio in conjunction with the commercial loan? Is a commercial loan officer taking steps to avoid tying the pricing and approval of a commercial loan to the condition that the customer transfers a securities portfolio to the broker-dealer affiliate? How can risk management cut across a dual regulatory scheme to protect the interests of the bank?

The prospect of tying or even consumer fraud is arguably more worrisome with these cross-sale relationships than the unauthorized opening of bank and credit card accounts by Wells Fargo employees. With the Wells scandal as a cautionary tale, regulators must look to prohibit dual-hat employees to protect the public and the integrity of the financial system.

Andre R. Perron

Andre R. Perron

Andre R. Perron is a partner at Barnes Walker in Bradenton, Fla.

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