WASHINGTON -- A senior regulator is warning bankers who dread routine examinations to brace themselves for a new wrinkle: mutual fund audits.

The auditors "who come through your doors the next time are going to be a lot more curious than before," said Owen Carney, senior adviser for investment securities at the Office of the Comptroller of the Currency.

"You are going to have to spend a lot more time with our examiners," he told an audience of 100 people at the Consumer Bankers Association's consumer investments symposium here.

Mr. Carney said that the Comptroller's office will probably institute a testing program to see if salespeople based in bank branches are disclosing the risks of investing in mutual funds.

New Intensity Seen

Already there are signs that regulators are getting tough on banks' investment products-programs.

"I never saw such intensity before," said Frank J. Bonetto, executive vice president in charge of Bank of the West's mutual funds program.

The bank, which is based in Walnut Creek, Calif., had its most recent exam in February.

During the investigation, Mr. Bonetto said that "regulators were really focused on due diligence." The Comptroller's office was also concerned that the bank was giving lists of its certificate of deposit customers to an outside marketing firm.

Oversight Issues

Another area the Comptroller's office has homed in on is how involved directors and senior managers are in overseeing their banks' investment products programs, Mr. Carney said.

"There is a real disconnect between senior managers and salespeople," he said.

Managers should not be surprised by examiners' findings or reports in the press saying that banks aren't always doing an adequate job selling mutual funds or disclosing risks. "If they are surprised, something is wrong," Mr. Carney said.

Ivory Tower

One reason that top-level executives may be unaware of compliance problems is that they are cloistered in the banks' "ivory towers." While sales practices may be fine in the main offices, branches are more likely to have probems.

"When we send people out to the hinterlands, we find reps using material that the main branch stopped using two years ago," Mr. Carney said. "That should not be happening."

Even some bankers admit that their investment products sales programs still need fine-tuning.

Drilling Required

"Maybe we deserve some of these compliance issues that are being put on us," said Ronald S. Hesser, executive vice president at CoreStates, Lancaster, Pa.

It is extremely difficult to turn employees into mutual fund experts overnight, Mr. Hesser said. "We have trouble getting them to say 'please' and 'thank you,'" 100% of the time, he said.

Still, the best protection against compliance problems is to train employees about investment products and how they are sold in banks, Mr. Carney said.

He also told bankers that explaining the risks of uninsured products to investors was more important than written disclosures. "We'll all be better off it there is more communication and less disclosure," he said.

That is good news for sales representatives who claim that the growing volume of warnings is scaring off customers.

"A lot of people in banks now look at disclosures at sales busters," said A. Stewart Rose, head of strategic marketing for the bank markets division at Fidelity Investments, Boston.

In terms of disclosures, Mr. Carney also said that customers have developed a capacity to filter out advertisements. "Maybe the money we're asking you to spend on advertisements with disclosures is not being well spent," the regulator said.

In another surprising admission, Mr. Carney said that banks do not have to use the exact OCC language for disclosures.

Barbara Worthen, general counsel for Fleet Investment Services, Boston, questioned this statement.

"When I was advising our people, I said the OCC loves its language. Use it. Should we be using it?" she asked Mr. Carney.

"It's a safe harbor, but it's not required," he said.

Later in the day, though, one banker commented that Mr. Carney "had a very loose interpretation of the law." When examiners come in, he said, they generally follow the letter of the law.

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