The Federal Reserve has directed its corps of examiners to step up scrutiny of bank mutual fund activities.

In a letter. to supervision chiefs at each of the 12 Federal Reserve Banks, the Fed said examiners should review banks' disclosure practices to make sure customers understand that mutual funds can fluctuate in value.

In addition, examiners should insist that mutual funds be sold only in "a physical location separate from the area where the business involving insured bank deposits is conducted," the Fed said.

"Signaling" by the Fed

The official guidelines are somewhat stricter and considerably more detailed than any issued so far by a bank regulatory agency.

They were spelled out in a June letter signed by Richard Spillenkothen, director of the Fed's division of banking supervision and regulation.

"The Fed is signaling that it is going to be active in this area, as the Office of the Comptroller of the Currency has been," said Donald W. Smith, a law partner with Kirkpatrick & Lockhart, Washington.

The Fed's guidelines apply to examiners of state-chartered banks that belong to the Federal Reserve System.

Joining Forces?

Regulatory scrutiny of the bank mutual fund business has intensified in recent months as the number of banks offering the investment products has ballooned.

The Comptroller's office has been in the forefront, but its guidance for the most part has been issued informally -- in speeches by senior executives or in letters to individual institutions.

Now the regulators appear to be joining forces. In his letter, Mr. Spinenkothen revealed that regulators are jointly reviewing "the sale of all uninsured investment products on bank premises."

"It is expected that, as a result of this review, a more extensive policy statement will be released at a later date," Mr. Spillenkothen wrote.

Industry observers said this is good news.

"Given the proliferation of statements and letters in this area, a coordinated approach is very desirable," said Mr. Smith, the Washington attorney.

In his letter, Mr. Spillenkothen said the Fed's key aim is to ensure that mutual fund sales activities are clearly separated from insured deposit-taking activities.

To that end, examiners were instructed to evaluate whether disclosures are effective in conveying that mutual funds are not guaranteed by the bank or the Federal Deposit Insurance Corp.

In addition, examiners are to evaluate whether banks that act as investment advisers to mutual funds disclose their role effectively.

The Fed also said that disclosures about the uninsured nature of mutual fund investments should be included by banks on Periodic statements, transaction confirmations, and promotional materials.

"As the level of mutual fund sales on bank premises increases, the need to carefully monitor these activities during the course of all examinations remains critical," Mr. Spillenkothen wrote.

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