U.S. Plans Protections for Bank Mutual Fund Buyers

Rules governing the sale of mutual funds by banks will soon be tightened to protect customers from mistakenly thinking their investments are federally insured, a top regulator said Sunday.

Comptroller of the Currency Eugene A. Ludwig, whose Treasury Department agency regulates nationally chartered banks, said he will issue a policy “in the near future” governing mutual funds and other investments not guaranteed by the Federal Deposit Insurance Corp.

“We will lean heavily on disclosure. For example, we will call on banks to disclose in the clearest possible way that investment products are not FDIC-insured,” Ludwig said in remarks prepared for delivery to a meeting of the American Bankers Assn. in Colorado Springs, Colo.

Funds deposited in banks are guaranteed by the government up to $100,000 per account, but when someone puts money into a mutual fund, it’s an investment, not a deposit, and is not insured against loss if the value of the underlying securities drops.

Agency lawyers are exploring whether the comptroller’s office, absent legislation, can require banks to have mutual fund customers sign a statement saying they know their investment won’t be insured, said spokeswoman Lee Cross. But if not, such statements will be suggested along with other disclosure methods.

Bank sales of mutual funds have exploded over the past few years as interest rates on deposits have fallen below 3%, a level not seen since the Depression.

Earlier this year, a study by the Boston-based Liberty Financial Cos. estimated that banks managed $156 billion in mutual fund assets, or 11% of all mutual funds assets.

Many bank customers, particularly retirees dependent on interest income, have sought the higher return offered by uninsured mutual funds.

However, the American Assn. of Retired Persons and other consumer groups have become increasingly worried that some people buying mutual funds through banks do not understand that their investment is at risk.

The comptroller’s office has found bank mutual fund advertisements mentioning that the bank was federally insured but not explaining that the mutual fund itself was uninsured, Cross said.

The office has not received customer complaints, she said. But consumer activists point out that stock prices now are near historic highs and few investors are likely to complain until they discover they have lost money.