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banks. What state securities regulators uncovered in their visits to bank lobbies is a marketplace rife with misleading advertising and promotional materials, a systemic breakdown in the distinction between traditional insured activity and the sale of uninsured products, and a serious gap in the consumer protections available to those who purchase investment products on bank premises.


Below are illustrative examples of what state securities regulators found in each of the following major areas of concern: (1) suitability/risk disclosure; (2) misleading references to FDIC and Securities Investor Protection Corporation (SIPC)" coverage; and (3) a blurring of the distinctions between bank activities and brokerage activities, including the use of similar or identical names.



An elderly Washington state resident complained to the Washington state Securities Division that she was misled by a Tacoma, Washington bank when she was persuaded to put funds from a maturing certificate of deposit (CD) into a mutual fund. The woman, a Yugoslavian immigrant, had intended to withdraw the funds from the maturing CD and take the money to another bank paying a higher return. When bank personnel learned this, they suggested that the depositor could earn a higher return by putting her money in a "government fund." When the woman asked whether the account would be FDIC insured, she was told that it was a secure investment because it was a government fund. She was told that the return would be significantly higher and that there would be no risk. The bank customer was not advised that this was an uninsured investment account rather than a traditional bank deposit account. The receipt she was given had the bank's name on it, as did the customer account form. There is no mention on any form that the money was being put into an uninsured investment product. It was only when a broker contacted her nearly two years later to advise her to withdraw her funds from the account because she was losing money that the woman learned that her money -- which represented her life savings -- had been put in a uninsured investment product and that the principal of her investment had been reduced by nearly $12,000. When the woman went to the bank to complain, she learned that the assistant branch manager for the bank was the very person who sold her the investment product and claimed that it was safe! (The assistant manager admitted that she was not licensed to sell securities at the time she sold the mutual fund to the woman in question her, although she claims she could "offer" securities at that

16 The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation, funded by its member securities broker-dealers. SIPC does not protect investors against losses from the rise or fall in the market value of specific investments. What it does is provide protection against certain losses it a SIPC member fails financially and is unable to meet obligations to its securities customers. (See, How SIPC Protects You, a 1992 publication of the Securities Investor Protection Corporation, Washington, D.C.)


time. She apparently now is licensed as a securities broker and continues to serve as the assistant branch manager for the bank.)

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The Colorado Division of Securities received a complaint from the daughter of an 80-year old widow who had been contacted by her Denver, Colorado bank (with which she had done business for 20 years) about investment products at the time her CD was maturing. The widow, an East German emigree, was told she could earn better interest rates if she moved her funds from the CDs into a mutual fund account. The woman later learned that it was not bank personnel she was dealing with when she was persuaded to put her funds in mutual funds, but rather a brokerage firm that has a relationship with the bank. This 80-year old woman's life savings was put into a load mutual fund that had about $4,000 in fees. Despite her complaints about suitability, the woman has been instructed that because she signed all the proper forms, there was no avenue of redress.

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A retired Crystal, Minnesota man on a fixed income was invited to his local bank to discuss options when his certificate of deposit (CD) was about to mature. When the man went to the bank for the meeting, he was unknowingly directed to speak to an investment sales representative and not a bank employee. During the meeting, it was suggested that the funds be placed in an investment vehicle that would pay a higher rate of interest than the CD, and equal to a CD in terms of safety and liquidity. When the man explained that he was not at all interested in any stock deal, he was reassured that what he was getting into would be very similar to the CD. Ultimately the man agreed to put his funds in what turned out to be a limited partnership, which contrary to the assurances, paid lower interest and was not at all liquid. The retiree explained that he had signed the necessary disclosure forms but that he was not given an opportunity to read them, nor was he provided and explanation of what he was signing. The limited partnership prospectus did not arrive at this home until several days after he had made the investment. Although the gentlemen later learned that he was dealing with a representative of the brokerage firm affiliated with the bank, at the time he believed he was dealing with representatives of a bank he had grown to trust. The investor claims that there was no physical separation between the banking and brokerage activities and that there were no posters or other signs that would alert someone that they were no longer dealing with a bank representative.


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The promotional materials for the brokerage services of a Wichita, Kansas bank suggest that "All securities in your Brokerage Account are protected by the Securities Investors Protection Corporation for up to $500,000 (limited to $100,000 for claims for cash)." Customers may mistakenly -- but understandably -- read that statement coming from a bank to mean that the "protection" works in 12

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much the same manner as FDIC insurance. Brochures in the bank lobby
describing the investment-related services of the brokerage unit failed to include
any mention whatsoever that these products are not FDIC-insured.
When asked about government insurance on a mutual fund, a sales representative
operating in the lobby of a Boston, Massachusetts bank said that a mutual fund
was as safe as a certificate of deposit (CD). The representative added that the
mutual fund is safer in some respects because a "an investment in a fund is
protected by SIPC up to $500,000, while a CD is only protected up to $100,000."
When asked if SIPC was a federal agency like the FDIC, the representative said
'no," but that it provided similar protection.
Brochures promoting the services of a Lincoln, Nebraska bank include
"Investment Alternatives" under the general heading of "Savings Plans." Although
there is a one-line, fine-print sentence indicating that investment products are not
FDIC insured, an open panel on the back of the brochure reads "FDIC INSURED"
in a general way. If the customer sees the cover, the first panels of text and the
back of the brochure, the message certainly would be that the products carry FDIC

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Slick promotional materials for the brokerage affiliate of a Kansas City, Missouri bank omit entirely any discussion of the lack of FDIC insurance for these products. The brochures appeared in a bank lobby.

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The brochure for the brokerage affiliate of a Little Rock, Arkansas bank advertises its investment-related services and prominently discloses the brokerage's ties to the bank. In fact, the bank name and logo appear in large print, as does the "Member FDIC“ notice. Nowhere on the brochure is it stated that FDIC coverage does not extend to investment products.

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The back panel of a brochure promoting the brokerage firm affiliated with a Denver, Colorado bank describes the uninsured nature of investment products in this manner: "_ Securities Corporation is not a bank and some of the investments it makes available are not obligations of, or guaranteed by a bank, nor are they insured by the FDIC." (Emphasis added.) Another brochure put out by the same brokerage firm includes the following "disclosures," which takes the FDIC/SIPC confusion to the worst extremes uncovered so far:

You have access to a variety of safekeeping services. Securities held in your investment account are covered up to $10,000,000 of protection, as detailed in the box below. (See next page.)

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An Arlington, Virginia bank uses the same logo and a nearly identical name for both its traditional banking functions and its uninsured investment operations. Additionally, the bank logo is imprinted on all of the inserts in a brochure detailing the banking, insurance and investment services of the institution. Brochures for both insured and uninsured products are commingled in the bank lobby and large posters just a few feet from the teller's windows advertise the availability of the investment products. The lobby posters do not disclose the uninsured nature of these investment vehicles.

o A Maine investor did business with a brokerage firm operating out of a bank lobby

and using a name identical to that of the bank. He was unable to
understand the difference between dealing with a bank and a securities firm. In
his complaint to state regulators, the investor made repeated reference to what "his
bank had done to him." His dispute actually was with the brokerage firm and
involved the fees associated with a municipal income fund he purchased after
cashing in his certificates of deposit.

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Customers of a Topeka, Kansas bank may understandably be confused by the promotional materials for the affiliated brokerage firm that goes by an identical name, has the same logo and uses exactly the same artwork as the bank.

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Examiners from the Colorado Securities Division illustrated the blurring of the lines between banks and brokerages and the concerns about inadequate disclosure in a report describing the various signs in a Denver, Colorado bank lobby. For


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example, in the area of the bank where investment sales representatives were located there was a small sign signifying "NASD member" and "SIPC." There were no signs indicating that the products being made available by the brokerage firm were not FDIC insured. In addition, a "State of Colorado Charter Bank" sign was displayed on the table immediately adjacent to the investment sales representative's desk.

o A Boston, Massachusetts bank and its brokerage affiliate share an identical name

and logo which is printed on the front cover of prospectuses for uninsured investment products. Brochures available in the bank lobby contain inadequate disclosure with respect to the risks associated with investment products and no information discussing fees is made available. Finally, there is no physical separation between the investment sales representatives and the bank's customer service personnel. There are no signs that would distinguish the investment and banking-related services.

A newspaper advertisement for the investment center affiliated with a Topeka, Kansas bank reads "Alternative Investments Are Now Available Where You Bank." Readers are advised that they may call a bank representative who will set up an appointment with the investment executives. The ad directly equates traditional investments (e.g., savings, CDs, etc.) with uninsured products, making them appear to be merely different alternatives.

The securities arm of a Denver, Colorado bank makes available to customers a brochure that asks:

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For three generations has enjoyed the reputation of being a premier
financial institution. We have been satisfying financial needs
with products such as checking and savings accounts, loans and CDs.
But, did you know we also provide personal professional investment
service through (name of brokerage firm)?

The return card asks consumers to indicate whether they are customers of the bank and, if so, what branch they most frequently visit.

A newspaper advertisement running in papers in Little Rock, Arkansas display the names of several big brokerage firms and then asks the reader: "Which Brokerage Firm Also Offers the Unique Insight of Arkansas' Largest Bank?" In the text of the ad it is asserted that the brokerage firm in question has not only the expertise

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