Magazine article American Banker

Comment: Don't Be Undercut by Unapproved Securities

Magazine article American Banker

Comment: Don't Be Undercut by Unapproved Securities

Article excerpt

It is pretty easy these days -- what with a long-running bull market and a scarcity of customer complaints -- to feel good about the compliance status of your bank-sited investment sales organization.

Actually, it is the perfect time to poke around for hidden flaws that can cause regulatory compliance problems.

One such flaw involves "selling away," which historically has been the bane of every compliance professional's life. Full-time registered representatives often get base salaries, fringe benefits, marketing and sales support, and referred leads and appointments. How unfair it would be, under these conditions, if the rep were to direct sales to unapproved products and prevent the firm from sharing in the resulting compensation.

Because of centralized control of the National Association of Securities Dealers and the requirement that all securities compensation flow through a registered broker-dealer, selling away registered securities is not the problem it once was. The NASD will always notify a member firm when its rep attempts to register dually with another broker-dealer. The same cannot be said of nonregistered products.

Given the popularity of fixed-rate annuities and most banks' desire to sell various forms of life, health, and disability insurance -- most of which are not registered securities -- there's a gaping loophole enabling reps to sell products that have never gone through the firm's due diligence. And the bank and its associated member firm may never know about it.

Flip through any issue of an insurance-trade periodical (like The National Underwriter) and you will find it rife with aggressive recruiting ads for "independent" agents. All one has to do is call an 800 number and ask that a product kit and license-appointment documents be sent to one's home. When the appointment is completed at the state insurance department, that person can (from the state's perspective) legally sell that company's product whether the bank approves or not. …

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