Bankers expressed surprise Monday at a top regulator's pointed criticism that consumers are not being adequately warned about the risks of mutual funds.
In a speech to the American Bankers Association convention on Sunday, Comptroller of the Currency Eugene A. Ludwig said he is "very unhappy ... that some banks are not complying with our guidelines in this area."
The regulator gave few details about the extent of the problem and declined to identify banks that are not in compliance. However, he made clear that he thought noncompliance, while not widespread, seems to be common enough to merit closer scrutiny by regulators.
Mr. Ludwig's remarks were met with dismay by bankers, who said they thought that compliance has been strong since July, when the Comptroller's office issued detailed guidelines on mutual fund sales practices.
"I don't think anyone is taking the issue lightly," said Michael Rothmeier, executive vice president for investment services at Shawmut National Corp.
Unfair Standard Seen
The guidelines require banks to disclose "conspicuously" that the products offered are not insured by the Federal Deposit Insurance Corp.; are not obligations of the bank; are not guaranteed by the bank, and involve investment risks, including the possible loss of principal.
Mr. Ludwig cited one case in which he said a bank used a six-page brochure to advertise its mutual funds, and hid its disclosure in a few lines of "minuscule type" on. the last page.
"The guidelines say |conspicuously disclose,' and conspicuously means you ought to be able to read it without a magnifying glass," said Leonora Cross, an OCC spokeswoman.
One industry expert complained that regulators are holding banks to an unfairly high standard.
"Banks have to read people their rights before they can sell them something, whereas securities people don't," said Edward Furash, president of Furash & Co., a Washington-based bank consulting firm. "It's the Miranda-izing of financial services."
Mr. Furash added that continued regulatory pronouncements like Mr, Ludwig's could chip away at banks' most valuable asset in the funds business: their credibility.
Banks' growing reputation as mutual fund providers could suffer if consumers "read day after day in the papers that the regulators are saying banks are not doing the right thing," Mr. Furash said.
Bankers, however, say the guidelines have already resulted in better disclosure.
Shawmut, for instance, has stepped up training of its investment-sales professionals, and recently introduced a new, plain-English disclosure form.
"The disclosure piece had been linked into the [investment] application," Mr. Rothmeier said. "Now the customer sees, reads, and signs a separate document."
Wells Fargo & Co. recently incorporated into all its mutual fund marketing literature a universally recognized emblem: a bold circle with a diagonal slash across it. The slash overlies the familiar FDIC seal that promises "each deposit insured up to $100,000."
Jacksonville, Fla.-based Barnett Banks Inc. is also grappling with consumer-awareness issues. The bank has formed a mutual-funds task force which is developing disclosure and compliance practices that will be implemented by yearend.
The Comptroller's office will begin "spot-checking" national banks to ensure that they are in compliance with fund-sales guidelines, Mr. Ludwig said.
In addition, the agency has developed an easy-to-read brochure in cooperation with the American Association of Retired Persons, he said.
Threat from Ludwig
Despite his criticisms, however, Mr. Ludwig said he believes guidelines, which do not carry the force of law, are adequate for now. Regulations, he said, are not necessary.
However, he added, "If the industry cannot find a way to police itself in this area, Congress will. And you are not going to like it."
Bankers expressed mixed feelings about Mr. Ludwig's criticisms.
"We've been in the brokerage business for five years, and have never had a complaint," said C. Robert Brenton, chairman of Brenton Banks Inc., Des Moines.
Keith Ellis, the Delaware banking commissioner, said he has yet to see a single problem in his state with mutual fund disclosures, and said Mr. Ludwig should wait before starting a new program.
"They ought to give the current guidelines time to work," he said.
For their part, OCC officials acknowledge that they are seeing signs of improvement.
"In one instance, a bank had no disclosure on their materials before the guidelines came out," Ms. Cross said.
"Afterward, it was in bold face. It was slightly smaller print, but not hard-to read."