NASD Regulation Fines NationsSecurities $2 Million for Term Trusts Sales; Two Senior Officials and Branch Manager Also Sanctioned
Washington, D.C.—NASD Regulation, Inc., today announced that it fined and censured NationsSecurities, two senior officials, and a Branch Manager in connection with the marketing and sale of the Nations Government Income Term Trust 2003 and the Nations Government Income Term Trust 2004. The officials – a NationsBank N.A.’s Senior Vice President and the National Sales Manager for Mutual Funds, NationsSecurities’ Executive Vice President of Sales and Deputy Chief Operating Officer, and its Houston Branch Office Manager during the relevant period – were all fined, suspended, and censured.
NationsSecurities, without admitting nor denying NASD Regulation’s findings, was fined $2 million. NASD Regulation found that during a focused sales campaign aimed at bank customers, including investors who owned bank certificate of deposits (CDs), NationsSecurities engaged in practices that blurred the distinctions between the bank and the brokerage firm, disseminated false and misleading information to investors, failed to adequately disclose the Trusts’ risks, and made unsuitable sales to investors.
As part of a coordinated regulatory effort, the Securities and Exchange Commission (SEC) and the Office of the Comptroller of the Currency (OCC) also announced settlements with NationsSecurities and NationsBank today. NASD Regulation thanked the SEC and the OCC for their assistance in this case.
Blurring Practices As part of Nations’ program to increase referrals from bank employees, brokers were encouraged to "blend in" with the bank, and some were also told, in effect, that they would be foolish to point out that they were not part of the bank. The brokers were advised to use the term "receipt" instead of "confirmation," the terms "account" instead of "closed-end fund," and not to use the term "commission" or "broker." NASD Regulation also found that some brokers sold the Term Trusts from banking centers that lacked the required signage identifying them as representatives of the brokerage firm. As a result, many bank customers believed they were doing business with a bank employee, not a broker.
"Bank broker/dealers have a duty to ensure that bank customers who purchase mutual funds and other investment products in banks are not confused about the distinction between a bank-insured product and a securities product. The misleading information disseminated about the investments, along with blurring the distinction between the bank and the securities firm, subjected numerous investors to undue risk and loss," NASD Regulation President Mary L. Schapiro said.
False and Misleading Sales Practices The Term Trust 2003 went public in August 1993, and the Term Trust 2004 in February 1994. The Trusts are proprietary closed-end funds that, because of the concentration in mortgage backed securities, investments in derivative securities, the use of leverage, and the long average maturity of the securities, were highly sensitive to interest rate changes. During 1994 interest rates rose significantly and the market price of the Term Trusts fell 35 to 40 percent below the $10 offering price. More than 11,000 customers across the country invested more than $300 million in the Term Trusts. NationsSecurities earned more than $11 million from sales of the Term Trusts.
NASD Regulation found that NationsSecurities’ sales effort included the use and dissemination of materially misleading scripts and statements, which were not filed with the NASD Regulation’s Advertising Regulation Department for review, as required. According to one script, the Term Trusts would provide "certainty in an uncertain world" – a materially misleading description of the fund. Some investors were told that the Term Trusts were safe or guaranteed, and would provide a full return of the principal invested, when, in fact, the principal was at risk. Investors were also told that shares could be sold at any time, but some were not informed that such a sale could result in a loss of principal, or that closed-end funds generally trade at below net asset value. In certain instances, the Term Trusts were compared to CDs, without an explanation of the significant differences between the two.
Unsuitable Sales NASD Regulation also found that NationsSecurities was aware that by soliciting sales from bank customers, its sales efforts would reach elderly, conservative, and unsophisticated investors. The firm’s orientation training materials noted that "NationsSecurities customers who are NationsBank retail customers are generally an older, more conservative investor. They are not very sophisticated in evaluating investment products. Most wouldn’t go to a brokerage firm, but feel comfortable using the bank for investment advice."
Sixty-five percent of the investors in the Term Trusts were more than 60 years old; 36 percent were at least 70 years old; and 11 percent were more than 80 years old. Forty-seven percent of Term Trust investors had annual incomes of $25,000 or less, with 19 percent of all Term Trust Investors having annual incomes of $15,000 or less.
Individuals Sanctioned All three Nations officials neither admitted nor denied NASD Regulation’s findings. NationsBank N.A.’s National Sales Manager for Mutual Funds, Daniel Wroble, was fined $100,000, suspended for six months in all capacities, suspended an additional six months as a principal, and censured. He must also requalify by examination before he can act in any registered capacity. Wroble made as many as three presentations a day to Nations’ sales force, and participated in conference calls with wholesalers, branch managers, and brokers to promote the Term Trusts. NASD Regulation found that while Wroble understood the essential nature of the Term Trusts, his sales presentations to brokers were materially misleading because he failed to adequately disclose the characteristics, nature, and risks of these investments.
Wroble consistently used a speech in which he held up a brochure featuring a picture of the U.S. Capitol and told the sales force (a significant number of whom were inexperienced) that as long as the U.S. Capitol was standing in 10 years, investors would receive their original investments back. This false and misleading statement – the promise of the return of full principal – was ultimately disseminated to investors
Charles King, NationsSecurities Executive Vice President of Sales and Deputy Chief Operating Officer during this period, was fined $50,000, suspended for three months in all capacities, and censured. He must requalify by examination as a registered principal. Houston Branch Office Manager, Jamie Atkinson, was fined $35,000, suspended for one month in all capacities, suspended an additional three months as a principal and censured. He must requalify by examination before he can act in any registered capacity.
NASD Regulation found that Atkinson developed the "Four Step Process" as part of a training session on sales techniques. King distributed this document to eight state managers, encouraged its use by all branch managers, and suggested that it be used to help less experienced brokers sell more successfully. The "Four Step Process" used materially misleading descriptions of the 2004 Trust, including: emphasizing safety, predictability, and yield with no discussion of material risks; misleading comparisons to bank accounts; misleading comparisons of the liquidity of the Term Trust to highly liquid exchange-listed issuers; and referring to this closed-end trust as an "account."
Supervision NASD Regulation found that NationsSecurities failed to establish, maintain, and enforce reasonable supervisory procedures to prevent these problems from occurring. These supervisory inadequacies existed notwithstanding the NASD’s continued emphasis on the importance of ensuring adequate disclosure in the sale of investment products to CD holders, in conducting sales at a bank-affiliated brokerage firm, and in effecting sales in off-site offices.
NationsSecurities was acquired by NationsBanc Investments, Inc. on January 1, 1998, and the findings and sanctions imposed by NASD Regulation apply to NationsBanc Investments, Inc., and to any future successor entity.
The investigation leading up to this action was conducted by NASD Regulation’s Enforcement Department in consultation with NASD Regulation’s Advertising Regulation Department.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD Regulation, and The Nasdaq Stock Market, Inc., are subsidiaries of the National Association of Securities Dealers, Inc. (NASD®), the largest securities-industry self-regulatory organization in the United States.