As 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.
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.