WASHINGTON -- Legislation is needed to "fill in the gaps" in the regulation of bank sales of mutual funds, said Matthew Fink, president of the Investment Company Institute.
Under current law, banks are exempt from the registration requirements of the 1934 Investment Company Act, Mr. Fink noted. In addition, bank trust departments can sell products that resemble mutual funds to pension plans without providing prospectuses.
"If you put $100 into a mutual fund for a 401(k) plan, you'll get a prospectus and quarterly and annual statements for the rest of your life," he said. "If you put $10,000 a year into a bank investment fund, you get zip."
"Legislation to settle this all out would be my own wish," Mr. Fink said in a meeting last week with a group of financial reporters.
1991 Bill Failed
The Bush administration attempted to deal with many of those questions in its ill-fated 1991 financial industry resturing bill. That measure would have given banks full mutual fund powers, but would have required them to register with the Securities and Exchange Commission.
Today, Mr. Fink added, the prospects for legislative change are bleak.
"Legislation is very difficult, because it involves several committees," he said. In the House, the banking committee and energy and commerce committee both have jurisdiction, and the two panels have taken very different approaches to new bank powers in the past.
In the absence of legislation, Mr. Fink said, the bank regulators should take steps to even out the differences between the regulation of bank funds and other mutual funds.
The institute recently recommended a number of steps to the federal banking agencies regarding the regulation of bank mutual funds. Among other things, the trade group called for prominent written notices to warn customers that mutual funds are not insured by the government or guaranteed by the bank.
In addition, the institute said, bank tellers should generally be prohibited from selling mutual funds, and from opening securities accounts or discussing the merits of any mutual fund while on the teller platform.
The institute also said banks should be required to provide additional disclosures when customers reinvest the proceeds of maturing CDs in mutual funds. They should be warned, for example, that bond funds are sensitive to interest rate swings and can lose value if rates rise, the institute said.
As interest rates have plummeted, an increasing number of bank customers have shifted funds from savings accounts to mutual funds.
However, some myths have sprung up about the nature of the mutual fund boom, Mr. Fink said.
The first is the widely advertised notion that the boom is being fueled by new money. About 60% of the growth is coming from mutual funds, Mr. Fink said. But the remaining 40% represents nothing more than appreciation -- the growth in fund value.
"Our evidence indicates that most of the people putting money into mutual funds already own funds," he said.
Some of the best evidence, Mr. Fink said, comes from studies of bank customers. The presumption was that bank lobbies, where individuals make decisions about how to reinvest maturing CDs, would be a prime source of new mutual fund customers.
It turned out, however, that "most of those people already owned mutual funds," he said.