Articles Posted in Bank Broker Dealers

school.jpgIt is a rare event when law students at the Investor Justice Clinic have the opportunity to participate in a securities arbitration case that goes all the way to hearing. The claim in question involved a Washington Mutual (WAMU) bank customer who was referred to the bank’s on-site stockbroker. The stockbroker was not a bank employee, but an employee of the bank’s stock broker affiliate. In this case, WAMU bank’s broker affiliate was WAMU Investments Inc., which later became Chase Investment Services LLC.

The trouble started when a helpful WAMU bank teller noticed that the customer had a large amount of cash sitting in her account and recommended that she speak with a WAMU financial advisor who could get her a better return on her assets.

[See related blog posting: Investor Alert: Beware of Stockbrokers That Prey on Bank Customers]

Thumbnail image for old bank.jpgAs both a securities lawyer and adjunct professor at the University of San Francisco where I supervise the law school’s Investor Justice Clinic, I have seen a never ending stream of victims who had a local bank teller steer them to a stockbroker sitting at a nearby desk inside the bank branch who promised them a much better yield than they were currently earning in their savings account or Certificate of Deposit (“CD”). All too often, the customer is not even aware that they are dealing with a stockbroker employed, not by the bank, but by the bank’s broker-dealer affiliate. In the most egregious cases that I have seen, the bank customer did not understand that the better yielding investments being recommended by the stockbroker were risky, uninsured products such as variable annuities and mutual funds.

See related blog posting: FINRA Sanctions Brokerage Firms Affiliated with Wells Fargo and Washington Mutual Banks for Variable Annuity Sales Violations

On June 16, 2010, FINRA implemented a new rule (Rule 3160) that was intended to require stockbrokers who conduct business on the premises of a bank to clearly identify themselves and to disclose the fact that investments offered are not FDIC insured, not guaranteed and may lose value. In my opinion, the new rules fall far short of curbing a bank’s ability to indiscriminately “switch” conservative banking customers out of savings accounts or CDs and into riskier uninsured securities products. Furthermore, Rule 3160 does not offer any real protection to banking customers. Based on my experience, requiring stockbrokers to give boilerplate written warnings will do very little to protect an unsophisticated investor from an aggressive stockbroker. What the investing public needs are rules that require enhanced supervision in situations where a bank customer is induced to “switch” from bank products to securities products. Furthermore, in the case of senior investors, there should be a presumption that the “switch” is unsuitable unless a supervisor has made an affirmative suitability determination.

Broker-dealers affiliated with Wells Fargo and Washington Mutual, two large banks with close ties to the San Francisco Bay Area, have entered into a settlement with the Financial Industry Regulatory Authority (FINRA) agreeing to pay fines of $275,000 and $250,000, respectively, and consenting to the entry of findings regarding their inadequate supervision of variable annuity, mutual fund and unit investment trust (UIT) transactions with customers. The two bank’s sell securities through Wells Fargo Investments and WM Financial Services, which is now doing business as Chase Investment Services. The other firms sanctioned by FINRA are IFMG Securities, PNC Investments and McDonald Investments (now KeyBanc Capital Markets, Inc.). Collectively, the five firms will pay fines to FINRA totalling $1.65 million.

These firms are referred to as “bank broker dealers” because of their close affiliation with a retail bank. A large percentage of a bank broker dealer’s business comes directly from referrals by employees of the bank. This arrangement can be misleading to bank customers who are often unaware that they have been referred to a stockbroker who often has a desk or office inside the bank branch.

According to FINRA, the sanctioned firms failed to properly supervise the sales practices of their brokers and did not conduct necessary suitability reviews or investigate questionable variable annuity, mutual fund and UIT sales to its customers, many of whom were elderly. The $1.65 million dollar fine was part of a settlement with FINRA in which the firms consent to the entry of FINRA’s findings, but do not actually admit or deny FINRA’s findings. Customers affected by these sales practice violations are not entitled to any restitution as a result of the settlement. In order to recoup any losses, affected customers are advised to consult with a securities lawyer.

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