Although more than 100 banks manage and sell their own mutual funds, federal law forbids them to "sponsor" the funds. That means banks must find an outside company to organize, register, capitalize, and promote their proprietary mutual funds.
Richard Kovacevich, president and chief executive of Norwest Corp., wants the rules changed to allow banks to participate fully in the mutual funds business. He made his case in a speech to the Federal Home Loan Bank of Seattle's annual management conference. Excerpts follow.
[Banks] need the ability to sponsor mutual funds. Fifty years ago, it would have been unlikely to even talk about banks and mutual funds because strong walls were erected between banks and securities companies.
A consumer who wanted a deposit went to a bank. A consumer who wanted a mutual fund went to a securities company.
Today, those walls have eroded somewhat.
To be strong and competitive, banks need to be where customers can go for a full range of financial services. Consumer research shows that banks are the first choice of customers who want to buy mutual funds.
Critics of bank involvement in sponsoring and selling mutual funds say customers will not understand that money in a mutual fund sold by a bank is not the same as a federally insured deposit in a bank.
The banking industry would be stronger and safer if it could be a full participant in this important part of the financial services business.