In one of his last major initiatives, Comptroller of the Currency Eugene A. Ludwig is urging fellow regulators to convert voluntary guidelines on uninsured investment products to mandatory rules.

His rationale: Regulators need more muscle to keep banks in line as they expand mutual fund and insurance sales.

"Our bottom line is to make sure investment products are sold responsibly," said Julie L. Williams, who as the Office of the Comptroller of the Currency's chief counsel will take over as acting comptroller when Mr. Ludwig's term ends in early April.

"We don't want consumers subjected to unacceptable risks, and we don't want banks putting their reputations at risk because of improper relationships with customers."

The difference between guidelines and rules comes down to enforcement. Ignoring a guideline might result in a tongue-lashing, but violating a regulation can result in fines and other penalties. Also, with hard and fast rules, examiners would be expected to scrutinize mutual fund operations more closely.

"Violations are a serious matter," said Richard M. Whiting, regulatory counsel for the Bankers Roundtable. "Banks will be faced with less flexible supervision and examiners will be putting more emphasis on these activities."

But the switch wouldn't be all bad, he said. For starters, compliance would be easier because rules are clearer than guidelines. Also, federal rules preempt state laws, which often are more restrictive.

Bankers said the guidelines are already strictly enforced, and added they are concerned new rules would increase the regulatory burden.

"We already are subject to a lot of redundant examination," said Alan R. Leach, president of Deposit Guaranty Investments Inc., a unit of Deposit Guaranty National Bank in Jackson, Miss. "At any given time, we could be inspected by the OCC, the NASD, and the Securities and Exchange Commission."

Mr. Leach said any new rule should increase coordination among the regulators and reduce the number of exams.

Ed Hipp, president and chief executive officer of the securities unit of Centura Banks Inc. in Rocky Mount, N.C., said new rules should recognize the NASD as the primary supervisor for bank mutual fund operations.

"Bankers already consider the NASD as the dominant voice on mutual funds, and the agencies need to realize they must present the industry with a common message," he said.

Consumer groups are expected to push for new rules. They argue that too many bankers fail to tell customers when investment products are uninsured and refuse to determine whether a specific investment is right for an individual.

"Study after study reveals that many financial institutions are failing to inform consumers," Mary Griffin, insurance counsel for Consumers Union, wrote in a Feb. 13 letter praising Mr. Ludwig's initiative. The letter was also endorsed by the Consumer Federation of America and the U.S. Public Interest Research Group.

The guidelines, issued in 1994 by the four banking and thrift agencies, outline the disclosures customers need to understand that investment products are not insured by the government, backed by the bank, and could decrease in value.

Banks are also urged to sell insured products and mutual funds in offices separated from deposit taking and only qualified employees should sell uninsured products.

On insurance sales, the agencies each use separate guidelines. But as more institutions enter the business, Mr. Ludwig said regulators need to develop a uniform policy quickly. Though no changes are possible before Mr. Ludwig steps down, OCC officials said there no reason to delay the debate.

"Folks at the various agencies have already chatted informally," said Ms. Williams. "It's time to get going."

Why?

Bank investment and insurance sales are being hotly debated as Congress considers financial reform legislation and regulators need to deflect criticism that they aren't strict enough. Consumer groups also have mounted pressure for tougher rules.

Finally, the National Association of Securities Dealers recently approved rules on bank investment sales and bank regulators need to make sure their policies are consistent, Ms. Williams said.

It's too soon to tell whether the other agencies will agree with the Comptroller's Office. So far, Mr. Ludwig has received responses from Federal Reserve Board Governor Susan M. Phillips and OTS Director Ellen S. Seidman-both of whom penned brief letters favoring discussions.

Federal Deposit Insurance Corp. and National Credit Union Administration officials are still working on their responses.

However, bankers have been asking for regulatory changes.

For instance, at the industry's urging the Fed last spring agreed to let banks put their names on mutual fund products. As a result, Citibank next month will rename is Landmark Fund to CitiFunds. In January, the JPM Pierpont Funds became the J.P. Morgan Funds.

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