WASHINGTON -- Strong resistence has surfaced at the Federal Reserve to plans by other banking regulators to conduct secret checks of mutural fund sales practices at banks.
In an interview this week, Fed Governor John P. LaWare denounced as "a witch-hunt" proposals to send undercover testers into branches where mutual funds are sold.
"That is a sting kind of an operation. It'sd entrapment," Mr. LaWare told the American Banker.
Both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have announced plans to dispatch "mystery shoppers" into bank branches. Two weeks ago, Comptroller Eugene A. Ludwig called on his fellow financial regulators to coordinate their efforts.
Hint Toward Fed Attitude
Although the Fed has not formally responded to the Comptroller's proposal, Mr. LaWare's comments strongly suggest that the central bank will not take part in the undercover shopping.
Mr. LaWare is widely considered the centrl bank's pacesetter on banking policy issues. And the Fed has resisted using testers in gauging banks' compliance with fair lending rules.
The Comptroller's Office and The FDIC would likely proceed without the Fed. But its absence would deprive the banking agencies of a unified front and, as a result, could prompt further criticism from Capitol Hill.
The Fed's decision would affect large member banks, such as Bank of New York Co. and Chemical Banking Corp. that have active mutual funds operations. It would also affect an estimated 300 small state-chartered banks that sell funds.
Decoys Explained
Undwer the plans, regulators would dispatch decoy investors to find out whether bank sales-people explain that mutual funds, unlike bank deposits, are not federally insured.
The testers could also gauge whether bank investment sales people are following "suitability" guidelines -- that is, making sure that the investments they sell match the financial needs of the customers who buy them.
Mr. LaWare said he doubts that the findings would be useful.
It would be more appropriate, he said, for regulators to encoruage banks to hire their own "mystery shoppers" to keep tabs on compliance with mutual fund sales guidelines. In fact, many banks already do so.
Touched Many Bases
mr. LaWare outlined his views on bank mutual fund activities during a wide-raning interview this week.
He stressed that bankers "must be more conscientious than anyone else" in explaining the risks of unisured investements to customers accustomed to buying insured products from banks.
"After 60 years of insured deposits in this country, there is kind of a mind fix on the part of many Americans that whenever they are dealing with a bank, they are dealing with an insured instrument," Mr. LaWare said.
At the same time, Mr. LaWare suggested that customers may be exaggerating their potential confusion about buying uninsured products in banks.
"A lot of people who say, "I was misled' are simply trying to transfer the responsibility for a decision to somebody else," he said.
Backs Certification
He expressed satisfaction that bank employees will soon be able to go the the National Association of Securities Dealers for certification to sell securities, as employees of brokers now do.
He noted that the Fed is close to putting out its new set of examination guidelines on an mutual fund sales.
Finally, Mr. LaWare said he views the sale of mutual funds by banks as just one step toward giving banks broad powers that would make them "central figures" in the securities business.
He said he expected the Glass-Steagall Act restrictions to be repealed in the next five years.
