Since 1990, First Union Brokerage Services of Charlotte, N.C., has sold securities in at least nine states without proper registration, according to the companys CRD record. Each time state regulators learned of the violations, the firm was ordered to pay a fine and was required to register its reps and/or its branches.
The most recent action against the brokerage arm of bank giant First Union Corp. came in Florida. State regulators in December ordered the brokerage to pay $300,000--its biggest fine to date for unregistered activity--and register 96 unregistered branches through which it allegedly sold securities since August 1993.
Other states ordering fines for unregistered activity include Arizona, Idaho, Massachusetts, Kansas, Vermont, Minnesota, Connecticut and Indiana.
The settlement reached between First Union and Florida ordered the brokerage to offer rescission to customers, hire an independent consultant to review its procedures and hire an independent arbitrator to resolve customer complaints.
We are complying with the obligations we agreed to with the Florida order entered in December, says a spokesperson for the bank, who declined to provide further details.
Some press reports have noted that the dispute resolution process has been delayed. The delay may be due to a class-action suit alleging fraudulent and misleading sales practices and securities law violations in Florida. The state order stipulated that if the class were certified, claimants would have their disputes with First Union resolved through legal channels.
The suit was settled amicably in June, according to Jonathan Alpert, the Tampa, Fla., attorney bringing the suit. The class was not certified, so First Union settled only with the six plaintiffs named in the suit. Therefore, First Union may now move to set up the resolution process and offer rescission to the 4,300 customers who bought securities from the unregistered branches.
According to public records and press reports, Florida customers bought securities in about 96 bank branches that were not registered--out of 550 branches in the state. In other states, First Union conducted phone sales prior to having some branches registered. First Union typically discovered the unlicensed activity when it started the process of applying for a license in a particular state. The states then took action.
Industry observers say fast growth, inexperienced staff and complexities of bank and broker/dealer regulation can cause problems for bank brokerages, but registration is pretty black and white, says a compliance director at a West Coast bank brokerage.
Bill Reilly, financial administrator with the Florida state office responsible for the December order, says complaints against bank brokerages have decreased compared with the period from 1994-95. Banks have became more familiar with operating broker/dealers and customers are more savvy, he says. A bull market and a general heightened awareness by bank brokerages and the public focused attention on the regulatory issues, he says. Reilly adds that new rules that address broker/dealer conduct on the premises of financial institutions were introduced this year.
Florida--The firm entered into a stipulation and consent agreement on Dec. 3, 1997. The department commenced an investigation after First Union voluntarily advised it in March 1996 that sales of securities by registered employees had occurred from locations that had not been registered.
Arizona--The state found that First Union Brokerage Services engaged in the sale of securities to Arizona residents prior to being registered. According to the states Sept. 26, 1997, filing, First Union consented to pay a penalty of $5,000 and restitution of $9,744.33 to five investors who lost principal. The firm became registered Aug. 1, 1997.
Idaho--In an order dated Sept. 17, 1996, First Union admitted violations of the Idaho Securities Act, offered rescission to Idaho investors and paid a $5,000 fine.
Massachusetts--The state filed Feb. 14, 1996, and First Union was ordered to notify its customers of its unregistered broker/dealer activity, to revise its compliance procedures and to pay a $15,000 fine.
Kansas--The firm entered into a consent order on Dec. 15, 1995, agreed not to violate provisions of the Kansas Securities Act and paid a $1,500 fine.
Vermont--Vermont filed Feb. 23, 1995. First Union entered into a consent order, admitted no wrongdoing and paid a $1,000 administrative penalty and $350 in costs.
Minnesota--Minnesota took action against First Union on Aug. 30, 1994, over alleged unregistered activity. The firm admitted no guilt, but agreed to pay a penalty of $1,250 and reimburse the state for the cost of its investigation.
Connecticut--Under terms of a July 6, 1992, agreement, Connecticut ordered the firm to review and modify its compliance procedures to prevent further violations. First Union was ordered to pay $2,750 in penalties and back license fees.
Indiana--The Indiana Securities Division filed a complaint July 23, 1990. On Dec. 18, 1991, First Union was ordered to submit an application for registration, to pay $8,000 for the cost of the investigation and to pay $5, 944 restitution to an Indiana resident.