brokerage negligenceBanks Soliciting the Sale of Securities

Banks no longer wish to be in the retail banking business. In the old days, it was said that bankers operated under the 3-6-9 rule. They paid 3% on deposits, charged 6% on loans, and went golfing at 9 a.m. However, historically, in order to pay 3% on deposits, with their deposits they can only make loans, which involve credit risk and the risk of default, and could only invest and manage a portfolio of treasury securities, whose value goes up and down with the movement of interest rates, and which also can be risky. With that 3% spread, if they were lucky, banks could pay their general and administrative expenses, which could be as much as 2% of assets, and again, if they were lucky, keep up with their peer group and generate a 1% return on assets.

However, the banks no longer want to be in the banking business. Instead of soliciting deposits, which as stated above are required to be managed for a meager 1%, they can solicit the sale of securities, typically proprietary or other mutual funds and variable annuities, where they could realize commissions of between 4% and 7% at the time of sale, and also receive ongoing income in the form of 12b-1 fees of as much as 1.25%. Best of all, if the stock market or interest rates go up, down or sideways, the investor bears 100% of the risk.

Accordingly, most major banks own affiliated brokerage firms that conduct business on bank premises. Most major banks own, or more precisely their holding companies own, mutual funds or investment companies. Through a series of dual registrations, many banks have cross selling arrangements with their related broker dealers, and also offer a platform of bonuses to retail bank employees to make “securities referrals,” where their customers are solicited to purchase securities. The banks do not want your deposits, they want your investment business. Many banks target even modest depositors or CD owners to offer “free investment evaluations,” or new ways to increase the return on their money market account. My bank keeps a chart on the wall in the lunch room of the branch tracking the securities referrals of each branch employee each month.

Over the last two decades, we have represented many customers steered by their retail bank to an affiliated brokerage firm, and through a series of misstatements and omissions, were sold unsuitable or otherwise inappropriate investments. In one case, we represented an immigrant from western Africa, barely proficient in English, who came to America, and was subsisting earning minimum wage at a food concession in the Philadelphia International Airport. One day traveling on a bus to visit one of his friends in a neighboring state, the bus was involved in a major accident. Our client was seriously injured and subsequently, received a relatively sizable legal settlement. Upon leaving his lawyer’s office, literally with his settlement check in hand, he went into the flagship branch office of a major international bank for the purpose of opening a savings account. He left the bank owning two annuities, six different mutual funds, and paid more than $20,000 in commissions. Less than a year later, almost half of his portfolio was erased by a downturn in securities prices.

On October 26, 2016, the Financial Industry Regulatort Authority announced that it is conducting an inquiry regarding incentives for bank employees to promote securities products of the affiliate or parent company to retail customers referred to as “cross-selling programs.”

Guiliano Law Group





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