Rolland D. Johannsen, president of Furash & Co. in Washington, believes that banks' activities in mutual funds will remain a hot policy issue for another two or three years. Excerpts from a recent interview follow.

Q.:What areas are bank regulators going to focus on?

JOHANNSEN: I think they are going to place more emphasis on such issues as compensation and referral practices.

Referrals from tellers, platform representatives, and the degree to which they are incented to refer customers out of traditional insured deposits into noninsured products without proper screening and due diligence.

I think the regulators will continue to look at things like the names of proprietary funds. And where they may have been rather lenient in the past, I think they will be less so now. The major issue, of course is the degree to which there is clear delineation and separation between the core banking activities and the investment product activities.

Q.: Is there anything else?

JOHANSSEN: I think they are probably going to start to look at how the proprietary fund area and the sale of investment products are being incorporated within the banks overall risk management policies and procedures.

Q.: What are the competitive implications of all this?

JOHANSSEN: Banks can't organize like a brokerage firm. They can't sell like a brokerage firm. They can't pretend they are a brokerage company that happens to be the affiliate of a bank. They need to find a different way to compete within a regulatory structure that places severe limits on their ability to compete.

Q.: Like what?

JOHANSSEN: Banks have to be able to leverage their core strengths - broad physical distribution, their position in the community, their current relationships with their customers.

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