To Avoid Litigation, Scrutinize Your Securities Sales Practices

Article excerpt

With the current volatility of the securities markets, financial institutions are likely to confront vastly increased enforcement and litigation risk related to the sale of securities products on bank premises and by bank-affiliated entities.

On the government enforcement front, about two years ago the Securities and Exchange Commission announced its intention to investigate and initiate enforcement actions against insured institutions that violate the federal securities laws when marketing and selling mutual funds or other securities products on bank premises.

In May 1998 the SEC announced a settlement with NationsBank related to charges that NationsSecurities had engaged in deceptive and misleading sales practices in its sales of mutual fund products during 1993 and 1994.

Over the past several years similar allegations have been made against Great Western, Amsouth, and Barnett Banks in private class-action litigation.

Additional enforcement and litigation activity is likely. An SEC representative has stated that the agency is "aware of similar complaints" against other banks. In addition, it has recently been reported to be investigating the mutual fund sales practices of other major banks. And plaintiffs' class action lawyers have stated an intention to bring additional actions.

Given these developments, banks offering investment products and services in competition with independent broker-dealers and investment advisers should carefully analyze their own sales practices.

Unless a bank carefully considers and designs its marketing efforts, government lawyers using 20-20 hindsight might deem them fraudulent or deceptive. Liability in this area could be premised on a banks' inaction, given that regulators increasingly require affirmative conduct to eliminate inferences of fraud and deception.

Historically, the bank regulatory agencies, not the SEC, have taken the lead in overseeing the sale of mutual funds by banks. In 1994 the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision jointly issued an "Interagency Statement on Retail Sales of Nondeposit Investment Products." It set guidelines for bank-affiliated sellers of such products.

The interagency statement requires that institutions not place the sellers of nondeposit products in proximity to the retail deposit area. Also, tellers and other employees in that area are not to make "make general or specific investment recommendations regarding nondeposit investment products," qualify customers for purchase of such products, or make recommendations. …