NEW YORK -- The New York City Department of Consumer Affairs on Thursday criticized the way some giant banks are marketing mutual funds to the public.

Institutions are failing to disclose that mutual funds are not federally insured, are using heavy-handed sales tactics, and are pushing risky funds to inappropriate investors, the agency complained.

The findings were based on telephone calls to salespeople at five institutions: Chase Manhattan Bank, Chemical Bank, Citibank, Dime Savings Bank, and Marine Midland Bank. Each bank came under varying degrees of criticism.

Survey Tactics Faulted

The study itself drew immediate criticism from bankers, who challenged the reliance on telephone interviews. They said, for example, that disclosure about the lack of deposit insurance is usually made in person.

The department, which plans to forward its findings to bank regulators, was even more critical of some brokers and fund companies.

It charged that advertising by Dreyfus Service Corp., Franklin Advisers, and Charles Schwab & Co. violated consumer protection laws. The companies face fines of up to $500 for each violation.

A Schwab spokesman denied using improper advertising. Officials at Dreyfus and Franklin said they were preparing a response.

The consumer agency, which announced its findings at a press conference Thursday, said it had launched the probe because of the explosion in use of mutual funds. It has published a 42-page guide for consumers seeking to buy mutual funds.

|Mystery Shoppers' Used

Consumer Affairs Department investigators phoned the banks in late June posing as first-time fund buyers with questions about fund types, safety, and management fees. One call was made to each bank, and the conversations lasted five to 10 minutes, the agency said.

The agency was particularly rankled by the failure to disclose that mutual funds are not protected by the Federal Deposit Insurance Corp. In an attempt to elicit this fact, the investigators asked: "Is my money safe?"

Among the five banks, only sales agents at Citibank and Marine Midland specifically pointed out the absence of insurance, the department said.

"We were disappointed that the banks didn't make it crystal clear that the funds aren't FDIC insured and that investors face a real risk of losing their principal," said Jennifer Kohn, who wrote the report.

Added Richard Schrader, acting commissioner of the department: "They may not have a legal obligation, but they, certainly, have a moral obligation" to disclose that up front.

But J. Edward Diamond, president of the unit that oversees Dime Savings'investment products, said phone disclosure is not a serious issue.

"It's wholly inappropriate to [disclose that] without any knowledge of customers' investment objectives or level of sophistication," he said.

Banks generally "gave a much harder sell" than salespeople at fund companies, the report said. This may occur because bank agents earn commissions, while fund agents often do not, Mr. Schrader said.

One exception: The Dime Savings representative was the only sales agent who gave "good answer," the department said.

The report was especially critical of salespeople at Citibank and Chase, who were "particularly eager" to have undercover investigators come into the office for presentations. "Face-to-face sales presentations can be intimidating to new investors" who don't know much about mutual funds, the report said.

But Mr. Diamond of Dime Savings disagreed. "If that's the case with those banks, I commend them," he said of Citibank and Chase. "I have to sit down with the customer and get to know them and their risk tolerances."

A Chase spokesman echoed Mr. Diamond, saying that personal meetings are preferable for discussing the risks involved with the complexity of mutual funds.

Bank representatives also frequently failed to steer first-time investors toward the more conservative fund investments they would likely be most comfortable with, the agency said.

The department singled out a salesperson at Chemical who "pitched the most risky investment and gave the least clear and accurate information."

Colleen Kelly, a spokeswoman for Chemical, said the bank couldn't respond to the individual allegation without knowing the specific case. But she added, "Our sales consultants are trained to make sure customers understand the strengths and limits of each type of investment."

Marine Midland declined to comment, while Citibank officers were unavailable.

The department also feels the Securities and Exchange Commission is dropping the ball by allowing banks to have fund names that are similar to their institution's. Bank regulators and the SEC have raised concerns about this, but have not prohibited the practice.

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