Magazine article American Banker

Scrutiny of Bank Mutual Funds Raises Fears about More Red Tape

Magazine article American Banker

Scrutiny of Bank Mutual Funds Raises Fears about More Red Tape

Article excerpt

Bank mutual fund operations, one of the industry's most promising new businesses, are suddenly caught in a regulatory drumfire.

Regulators and lawmakers are issuing a barrage of questions and warnings. The big worry is that the bank mutual fund boom could go bust if stock and bond markets drop, hurting both consumers and banks.

Just last month, two powerful congressional committee chairmen -- Rep. John Dingell, D-Mich., and Rep. Henry Gonzalez, D-Tex. -- ordered the General Accounting Office to investigate the implications of the surge in bank fund sales.

Congressional hearings are likely as early as this fall, after the GAO reaches tentative conclusions. More hearings could follow in the spring, when GAO officials say their final report will be ready.

Dismay and Uncertainty

Few believe that regulators will force a rollback of the bank mutual fund business. But the heightened congressional interest and the possibility of tougher regulation have created consternation and uncertainty among banks that are pushing into investment products.

"If the regulatory environment is not clear, that makes planning difficult," said George Bernard, mutual fund chief at PNC Bank Corp., Pittsburgh. "Obviously, that's going to hurt people."

The heightened attention has prompted some banks to exercise greater care in choosing salespeople and disclosing investment risks. But so far, no banks have beat a retreat from the business.

Is the scrutiny dampening banks' enthusiasm for mutual funds? "I don't think so," said Kurt Cerulli, principal of Cerulli Associates, a Boston-based consulting fir. "Does it have the potential to become cumbersome? Yes."

Laundry List of Concerns

Among the worries on bankers' minds:

* Should banks let existing staff sell funds as well as traditional bank products -- or should they hire licensed brokers who deal strictly with investment-products customers? The latter approach would more readily pass muster with regulators.

* Will regulators crack down on the growing practice of adopting banklike names for proprietary mutual funds? If so, switching names could be costly and perhaps embarrassing for companies like NationsBank, First Union, and PNC, which use like-sounding names for their funds.

* Should banks reprint existing sales literature when they need more -- or wait to see if they will be required to disclose additional information about investment risks to customers?

The call to arms by Rep. Dingell and Rep. Gonzalez was the culmination of a war of words that has raged all year. Since January, federal banking, securities, and brokerage regulators, joined by state securities regulators, have been probing the bank mutual fund business.

Why the heightened interest? …

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