The interagency statement on retail sales of nondeposit investment products, issued Feb. 15, has certainly raised the excitement level of compliance and audit staffs as financial institutions prepare for their first exams under this so-called guidance.

Yet the real safety and soundness issue is connected to banks' investment management of mutual funds and any affiliated relationships between those mutual funds and the financial institutions advising them.

Fair Warning

Why have consumer issues taken a front seat to the many safety and soundness issues that confront banks with proprietary mutual funds?

Obviously, what has led us down this path is the concern of Congress about constituents who don't understand the difference between an insured certificate of deposit and a noninsured mutual fund.

Mutual funds are not insured. What more can banks do to ensure that consumers understand this? It is simply impossible to regulate and prevent consumer ignorance.

Congress should be spending its time reviewing and understanding more important issues that are confronting the regulators. Among them:

* How do regulators ensure that financial institutions do not fund proprietary mutual funds in times of crisis and vice versa?

* Are examiners aware of the affiliated relationships between a financial institution and a mutual fund?

* Haven't financial institutions, in effect, taken the step of guaranteeing mutual funds?

* Are financial institutions going to serve as the lender of last resort to their proprietary funds?

* What effect should this activity have on an institution's capital base?

These are the issues that can cause an institution to fail and taxpayers to fund a bailout.

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