National City Bank of Minneapolis knows there is no magic formula to judge which mutual funds best suit a specific customer's needs.

Connie Weinman, compliance counsel for the National City Bancorp. unit, said her brokers follow specific guidelines to match potential customers to the most appropriate funds. Prospects are asked to fill out questionnaires to describe their investment goals. Once a sale has been made, brokers track how those goals change over time and which funds are the most profitable.

Regulators expect banks to assess each customer's needs to determine what investments are suitable. Failure to comply with these so-called "suitability" requirements can lead to big fines.

Just ask NationsBank Corp. It sold two high-risk closed-end mutual funds to a couple in Austin, Tex. The funds subsequently lost 80% of their value. The bank settled out of court last December, agreeing to pay the couple $30 million.

Ms. Weinman said the settlement should have helped bankers wake up to the suitability issue and clean up their acts.

National City seems to be convinced it has the problem under control. The bank "has been familiar with the suitability issue for some time," Ms. Weinman said. "But the majority of banks probably aren't doing enough."

National City sells mutual funds to its customers through Financial Network Investment Corp., a Torrance, Calif.-based brokerage firm. Ms. Weinman said Financial Network's brokers ask customers to disclose their income, net worth, and financial objectives. This last category is especially important because it includes the length of time the consumer plans to hold the investment and the amount of total return they are seeking.

Marietta Perkins, a senior manager with KPMG Peat Marwick in Washington, D.C., said the checklists and questionnaires National City uses are effective ways of helping match a customer with the right product.

"The more standardized you are, the better," she said. "Checklists are good because they remind the broker of what they need to find out. And while you don't want to take all of the freedom out of the sale, the more structure you can have, the better."

Compliance officers can't let their banks' suitability programs end with the customer, cautioned James Harris, a consultant with Louisville-based Professional Bank Services. Prudent banks also drop poorly performing funds from their portfolios, he said.

Ms. Weinman said her bank reviews how its mutual funds are doing each quarter. "And if one does badly, our brokers will no longer be permitted to sell the product," she said.

Banks can still get into trouble even if they quiz the customer on their investment goals and periodically review the performance of their funds, according to Ms. Weinman. Institutions also must train their brokers to understand each mutual fund's tendencies, she said. This allows brokers to better match a customer's goals with the appropriate fund.

The issue of fitting mutual fund customers with products that suit their needs and investment goals came to the forefront in 1994 when the four banking regulators released guidelines on nondeposit investment products.

The regulators wrote that banks "should make reasonable efforts to obtain information on each customer's financial condition, tax status, and investment objectives." The goal is to match investments with the customer's needs. For example, regulators don't want a bank to push a cautious, risk-averse customer into a fund that fluctuates wildly.

Banks aren't off the hook once the sale is finalized, either. The guidelines indicate that customer data should be updated periodically, which consultants suggested means at least once a year.

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