Magazine article American Banker

LaWare Raps Regulators' Plan to Snoop on Fund Sales

Magazine article American Banker

LaWare Raps Regulators' Plan to Snoop on Fund Sales

Article excerpt

WASHINGTON -- Strong resistence has surfaced at the Federal Reserve to plans by other banking regulators to conduct secret checks of mutural fund sales practices at banks.

In an interview this week, Fed Governor John P. LaWare denounced as "a witch-hunt" proposals to send undercover testers into branches where mutual funds are sold.

"That is a sting kind of an operation. It'sd entrapment," Mr. LaWare told the American Banker.

Both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have announced plans to dispatch "mystery shoppers" into bank branches. Two weeks ago, Comptroller Eugene A. Ludwig called on his fellow financial regulators to coordinate their efforts.

Hint Toward Fed Attitude

Although the Fed has not formally responded to the Comptroller's proposal, Mr. LaWare's comments strongly suggest that the central bank will not take part in the undercover shopping.

Mr. LaWare is widely considered the centrl bank's pacesetter on banking policy issues. And the Fed has resisted using testers in gauging banks' compliance with fair lending rules.

The Comptroller's Office and The FDIC would likely proceed without the Fed. But its absence would deprive the banking agencies of a unified front and, as a result, could prompt further criticism from Capitol Hill.

The Fed's decision would affect large member banks, such as Bank of New York Co. and Chemical Banking Corp. that have active mutual funds operations. It would also affect an estimated 300 small state-chartered banks that sell funds.

Decoys Explained

Undwer the plans, regulators would dispatch decoy investors to find out whether bank sales-people explain that mutual funds, unlike bank deposits, are not federally insured.

The testers could also gauge whether bank investment sales people are following "suitability" guidelines -- that is, making sure that the investments they sell match the financial needs of the customers who buy them. …

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