Watch your salespeople, or else!

That's the message compliance officers got from a Federal Deposit Insurance Corp. survey of investment product sales practices released last week.

The study found that bank salespeople aren't telling customers enough about mutual funds: 28% of those surveyed in person weren't told the products do not carry FDIC insurance, and 30% said they weren't told the products are not guaranteed by the bank.

The results caught FDIC Chairman Ricki Helfer's attention. She said the agency would conduct seminars to train bankers on the disclosure. Also, she said the agency would require examiners to spend more time reviewing bank mutual fund sales.

Bankers and consultants said the survey should put the industry on notice that it has a disclosure problem. Failure to fix the problem will result in fines and penalties, they warned.

"Banks need to have some sort of process to watch their salespeople," said Malcolm P. Northam, capital markets manager with the Secura Group in Washington. "If you don't do it, eventually the regulators are going to do it. And you don't want the regulators to do it."

The banking agencies adopted guidelines in 1994 that require bank salespeople to inform customers that mutual funds are uninsured and can lose value.

Many bankers and consultants said "mystery shopping" is the most effective way to fix the problems identified by the FDIC.

During these tests, a "shopper" enters or calls a bank, pretends to be a customer, and then reports on the salesperson's performance. In theory, mystery shopping allows the bank to evaluate salespeople under otherwise normal circumstances.

"We felt we could get truer results as to what the customer was actually told," said Jean Jumet, director of compliance with Crestar Bank in Richmond. "It wouldn't do any good for me to call and pretend to be a shopper, because they would all know me."

Consultants said the evaluations should include as many branches as possible. Smaller banks should test their salespeople at least every year and a half, while huge banks should have some sort of ongoing evaluation, they said. Otherwise, banks risk getting an incomplete and inaccurate picture of the performance of their salespeople.

But banks often can't afford to be as thorough as they might like. Banks frequently pay more than $10,000 for mystery-shopping studies by outside firms. Mr. Northam said banks too often choose the cheapest firms to do the studies, regardless of the quality of their work.

Some bankers offered another way to resolve the FDIC's worries. Connie Weinman, compliance officer at National City Bank in Minneapolis, said her bank calls each of its new customers a few days after an account is opened to "welcome" the customer to the bank and reiterate the required disclosures.

This system of callbacks is common among banks that don't mystery shop. The "call" can be a phone conversation or a welcome letter. It is intended to confirm the customer's identity and to drive home the disclosures.

Still, said Sai Huda, compliance director at San Diego-based Advanta Corp., future FDIC studies are likely to find continued problems . Some banks lack the personnel needed to comply, he said.

"A lot depends on the size of the bank," Mr. Huda said. "A larger bank is much more likely to have some sort of program because they have more resources. At the bare minimum, every bank should have some sort of compliance program to keep up with this."

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