State securities regulators are stepping up their scrutiny of bank mutual funds, following the lead of federal officials.
The North American Securities Administrators Association has initiated a study of the retail practices of banks that sell funds, association president Barry Guthary said.
The group, an umbrella organization for state securities commissioners, could use the findings to argue for increased jurisdiction over banks' mutual fund activities.
Areas of Concern
The study, due by yearend, will emphasize mutual fund sales activities at banks, particularly whether banks adequately disclose the uninsured nature of mutual funds and whether their sales staffs are qualified to sell investments, said Mr. Guthary, who is director of securities in Massachusetts.
Regulatory scrutiny of bank mutual fund activities has intensified in recent months as low interest rates on deposit products have prompted more and more banks to offer uninsured, higher-yielding alternatives.
In recent months, the Office of the Comptroller of the Currency and the Securities and Exchange Commission have sharpened their focus on bank mutual funds.
Most recently, two prominent congressmen ordered the General Accounting Office to probe the growing role of banks as a channel for mutual fund sales.
Mr. Guthary said his group's study was sparked by concerns over the continued consumer exodus from federally insured savings into uninsured and riskier investments such as mutual funds.
A `Problematic' Trend
Though there have been few complaints about banks' sales practices, "the trend itself is problematic," said Richard W. Hubbard, securities commissioner of Delaware, who is over seeing the study for the association.
"Historically banks have not sold securities. Now they're selling them," Mr. Hubbard said in a telephone interview.
"It's not until the market collapses and consumers actually realize losses that we'll really start hearing complaints."
Different Standards
While salespeople at securities firms are required by both state and federal law to pass examinations and become licensed to sell mutual funds, bank employees do not live by the same rules, the regulators maintained.
However, because banking and securities laws vary from state to state, it is not clear whether state regulators can legally hold banks to broker-dealer licensing requirements or go after banks for securities fraud.
In a written opinion earlier this year, the Office of the Comptroller of the Currency held that neither the Securities and Exchange Commission nor state securities regulators have jurisdiction over national banks.
"Obviously, if individuals in banks are committing fraud, one would think the states could prosecute that without preemption, but it's not clear at this point," said Mr. Hubbard.
As a result, the study will examine the need for increased state securities department jurisdiction. It will also look at sales practices and supervision questions.
`Not Disclosure-Oriented'
"We want to make sure the securities being sold are suitable for an individual, that there is no churning of products so that marketers can earn additional commissions, and that there is no fraud," Mr. Hubbard said.
"Banks do not have a securities salesman culture," Mr. Guthary said. "They are not disclosure-oriented."
"Where we'll run into problems is when tellers get rebates or transaction fees for selling mutual funds," he added. "That's the kind of thing that starts abuse."
Though Mr. Hubbard noted that the group will examine whether increased regulation is needed, he said it is too soon to say whether the study will find problems or prompt the group to call for legislation.
