As banks become more active in the mutual fund business, they are inevitably coming under growing scrutiny from Congress.

On Oct. 19, House Banking Committee Chairman Henry B. Gonzalez introduced legislation that could force banks to revamp their mutual fund sales programs.

In a statement delivered on the floor of the House of Representatives, the Texas Democrat said he is concerned that bank customers may not fully appreciate the differences between insured deposits and uninsured investments. He pledged a committee vote by yearend on the bill, which is cosponsored by Rep. Charles Schumer, D-N.Y.

Chairman Gonzalez's statement is reprinted below.

I am pleased to introduce today the "Depository Institution Retail Investment Sales and Disclosure Act" with my colleague from New York, Congressman Chuck Schumer.

This legislation is prompted by our great concern over the retails sales of nondeposit investment products by insured depository institutions.

The timing of this bill is critical. In the past few years, mutual funds have exploded into a $2.1 trillion market, from $135 billion in 1980. Assets of mutual funds have exceeded those of deposits for the first time in our history. More than one-third of the banking industry now sells mutual funds.

The purpose of this legislation is to prevent consumers from buying an uninsured product such as a mutual fund or annuity, mistakenly believing that the product is federally insured. We don't need another Lincoln Savings and Loan debacle where thousands of customers bought bonds thinking they were as safe as CDs, only to learn they were really worthless junk bonds.

Although some federal banking agencies have issued guidelines regarding sales of uninsured products, this legislation would go further to protect consumers from misleading and deceptive sales practices.

Our bill would ensure not only that banks be required to follow the SEC's rules for brokers and dealers, but also that they take into account the special risks of unsophisticated customers. This bill is designed to protect the vulnerable customer from unsafe and unsound tactics we have seen used in previous scandals.

Self-Policing Is Inadequate

We cannot trust that banks' self-policing practices will avert another tragedy like the Lincoln Savings and Loan debacle of the 1980s when thousands of mostly elderly customers bought uninsured bonds from the California savings and loan believing they were federally insured.

No one told them these bonds were uninsured - if anything, Lincoln employees contributed to the problem by disabusing customers of any notion that the bonds might be uninsured.

When Lincoln was taken over by the government in April 1989, more than 23,000 customers were left with $255 million of worthless bonds. Many people lost their life's savings.

Our legislation will keep bank customers fully apprised of all the risks of purchasing investment products.

This bill is critical because, unfortunately, many people still think that anything they get from a bank is federally insured. We need to make sure that tellers and customer representatives - who deal most frequently with customers - clarify the uninsured nature of these products.

This legislation requires full disclosure that the product is not insured by the government and that the consumer is aware that money may be lost on the investment. In addition, the customer must sign a form acknowledging the disclosure before any initial purchase.

The legislation also addresses the scenario where a customer, understandably, is confused over the association between a bank, which is federally insured, and the name of the bank's uninsured products offered by or through the bank.

For example, how can a consumer be expected to immediately make the distinction between the federally insured American Bank or its uninsured so-called American Bank mutual fund?

The Office of the Comptroller of the Currency says that banks may not use their name in the labeling of uninsured bank products. The Gonzalez-Schumer bill specifically prohibits banks from using even similar names or logos. This bill will help avoid such confusion in the future. It also allows banks a transition period in recognition of existing arrangements.

To further prevent customer confusion, the legislation regulates the setting and circumstances of investment sales by physically isolating the area where uninsured mutual funds or annuities are sold from the area where a customer engages in everyday banking services, such as making deposits. Thus, the customer will have to seek out the services on his or her initiative.

Firewalls Mandated

This bill serves to deter methods used in the Lincoln Savings and Loan crisis, where tellers were receiving bonuses for pushing uninsured bonds and meeting quotas established by each branch.

Currently, federal banking agencies only require "to the extent permitted by space and personnel considerations" that banks take steps to separate the retail deposit-taking and retail nondeposit sales function of banks.

Clearly this is not enough Under our legislation, even the smallest depository institution must figure out a way to physically separate its noninsured businesses from its insured. While this may cause some inconvenience at first, the payback in greater customer protection is worth it.

Tellers must also refer customers to the area of the bank where they can purchase uninsured financial instruments. Under our legislation, the teller is not even allowed to comment on customer requests for information on uninsured products but must refer them to the employee or employees responsible for selling the product.

As it stands today, customers may be misled by the teller who deposits their federally insured money and then turns around and sells them an uninsured investment product.

Currently, banks provide names and addresses of their customers, along the CD balances and maturity dates, to affiliated brokers who sell uninsured products. The federal banking agencies do not address issues of confidentiality in this situation. This bill would require written customer consent prior to the disclosure of any confidential information.

More than Guidelines

The reforms in this bill are needed because they exceed those of federal banking agencies, which "emphasize," "recommend," or "advise" requirements of the banks they oversee. This legislation mandates reforms.

The Lincoln Savings and Loan scandal serves to remind us that consumers who are not informed about the risks involved with their investments can lose big. I urge all members to support passage of this bill to protect those who may not have all the information they need. It is my intention to bring this bill to a committee vote this year since the sooner the consumer is protected, the better.

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