Rep. Richard H. Baker on Wednesday asked regulators to develop rules that would allow them to punish bank employees who misinform customers that nondeposit investment products are federally insured.

"I would be very interested in some proposal that would give you the right or ability to at least to suspend those individuals ... until the institution ... has satisfied you that the practice has been curbed," the Louisiana Republican told bank regulators during a hearing of House Banking's capital markets subcommittee.

The lawmaker's request was prompted by a Federal Deposit Insurance Corp. report, released in May, that found 4% of bank employees told prospective investors that nondeposit investment products were insured by the agency.

FDIC Chairman Ricki Helfer said regulators currently do not have the authority to take formal action against bank employees who misrepresent facts to customers. Ms. Helfer said she would look into developing a rule that would allow her agency to suspend employees in such cases.

Rep. Baker, chairman of the capital markets panel, called the hearing to get an update on how FDIC-insured banks protect customers who invest in mutual funds and other uninsured products.

Lawmakers were generally satisfied that the banking industry is doing a good job of informing investors of the risks involved with uninsured investment products.

Their satisfaction with the industry's performance was bolstered by the results of a joint survey released this week by the Office of the Comptroller of the Currency and the Securities and Exchange Commission. The study found that bank customers are as well-informed about the risks of uninsured investments as customers of nonbanks, such as brokerage firms.

In light of this finding, Rep. Baker questioned the need for the multiple examinations to which bank broker dealers are subjected. Currently, the approximately 90% of bank broker dealers that are registered with the National Association of Securities Dealers are supervised by both the SEC and the bank's regulator.

"There are multiple agencies looking at the bank, but only one looking at the securities firms," Rep. Baker said. "Perhaps what is really needed is standardization."

A recent NASD proposal would do the opposite by lumping additional burdens on bank broker dealers, industry representatives complained at Wednesday's hearing. Among other things, the proposal would prohibit broker dealers from obtaining bank customer information without prior approval.

The proposal "would treat banks differently from other providers, and would, in fact, put banks at a competitive disadvantage in the sale of mutual fund products," said James W. Wert, executive vice president of KeyCorp, Cleveland.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.