Federal Reserve and FDIC to expand bank workers' mutual fund training Some customers could be misled about investment risks


WASHINGTON -- Federal banking agencies said yesterday that they are moving to expand training of bank employees to make sure that the employees don't deceive customers about the risks of mutual funds.

The statements to Congress by the Federal Reserve and the Federal Deposit Insurance Corp. come amid studies showing considerable confusion among bank customers about the risks of mutual funds sold on bank premises.

Federal investigators also are looking into allegations that NationsBank Corp. and First Union Corp. misrepresented the risks of mutual funds sold by brokers at their bank facilities.

Federal Reserve Gov. Edward Kelley Jr. told the House Banking subcommittee on capital markets that banking agency staff plans to propose an education and testing program for bank employees.

1997 implementation

The plan, to be issued as a rule proposal in the fall, is likely to be adopted by the Fed and other banking regulators early next year, Kelley said in an interview after his testimony.

"There's very little of substantive dispute," Kelley said.

"There's a common interest in having good, solid training and in preventing bank participants from acting in an undesirable way."

American Bankers Association representatives said yesterday that they support the plan, which would require employees to pass an examination before beginning to sell securities and would impose continuing education requirements.

FDIC Chairman Ricki Helfer testified that her agency plans to start training bank and thrift employees on 1994 regulatory guidelines to limit the blurring of lines between bank products and mutual funds.

The training, to begin later this year, will draw on training kits that include a role-playing video, she said.

The 1994 guidelines, agreed on by four banking agencies, prohibit bank tellers from selling mutual funds, require a separation of banking and mutual-fund sales areas and bar banks from selling mutual funds that bear the bank's name.

Rep. Charles E. Schumer said those guidelines "just haven't done the job." "All the surveys show continuing shortfalls in full disclosure," the New York Democrat said at the hearing. Banks sell about 14 percent of the $3 trillion in mutual fund assets in the United States.

The Securities and Exchange Commission is considering whether to adopt a rule to create additional safeguards against bank deception in the sale of mutual funds.

One section that has stirred a wave of criticism from banking groups would prohibit brokers from using confidential information provided by banks without the customers' prior written approval.

More clarification sought

Kelley testified yesterday that the Federal Reserve has sought "additional clarification" of this provision from the National Association of Securities Dealers, the self-policing industry body that proposed the rule.

The Federal Reserve hasn't taken a position on the SEC proposal, Kelley said in an interview.

The confidentiality section is likely to be changed because of the opposition it has drawn, a securities industry regulator said.

The plan, issued as a rule proposal in March, is unlikely to be adopted in the near future, the regulator said.

Yesterday's hearing was convened to examine the business practices of the rapidly increasing number of banks that sell mutual funds. An FDIC survey in May found that 28 percent of banks' fund customers weren't told that the funds lack deposit insurance.

A joint SEC-Office of the Comptroller of the Currency study, released this week, found that one-third of the customers believe that money market funds are insured, and found that investors who buy funds at banks tend to be as knowledgeable about risk as those who purchase funds at brokerage firms.

Pub Date: 6/27/96

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