Derivatives fiascos should serve as warning to mutual fund sellers.

The recent spate of litigation between losers in the derivatives market and those who sold the instruments should be a harbinger for bankers.

It will be interesting to see the outcome of litigation against Bankers Trust New York Corp. involving such giants as Procter & Gamble Co. and Gibson Greetings.

The primary issue that surfaces in these and similar examples turns on the question of whether the purchaser of the derivatives is a sophisticated investor. It may be arguable that a small college in Odessa, Tex., does not have the expertise to analyze the risks involved in those investments, but can a similar argument be made for Procter & Gamble?

The analogy to be drawn within the banking industry is the sale of mutual funds to customers. If the courts and/or the settlements shake out in such a way that companies like Procter & Gamble are not deemed sophisticated investors, such outcomes would surely heighten bankers' concerns in the sale of interest-or market-sensitive investments to customers.

Clearly, there will be immense potential for litigation when a market correction or other events result in a dramatic drop in the value of mutual funds. While regulators and others have admonished bankers to proceed with caution and an abundance of disclosure, I suggest several additional steps.

* Training and retraining at the transactional level is the best line of defense against policy or legal violations. This training should include reviews and testing of personnel handling customer transactions and periodic monitoring of compliance performance.

* Policy, procedure, and training programs designed to fully inform customers of the risk involved in acquiring nontraditional banking investments must be thoroughly and continuously documented. This documentation should be maintained in detail to provide proof of the institution's diligence in customer edification and protection.

* The financial institution should fully understand the product it is selling to its customers. If the institution does not understand the risks, it is difficult to demonstrate that the customer can understand them. Strong marketing and sales efforts are critical in ensuring the success of nontraditional bank products.

Strong controls and monitoring of the process will ensure that today's growth and profits are not given up in tomorrow's litigation.

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