Market Watch : Regulators’ Plan to Make Bank Trusts More Accessible Sparks Battle : Securities: Institutions would be able to advertise the accounts and charge whatever fees states permit. Mutual fund operators are irate.

The trust departments of banks, traditionally the venue of the rich if not the famous, may be about to become accessible to the merely prosperous--a prospect that has the mutual fund industry crying foul.

Under regulations proposed by federal bank regulators, national banks would be able to start advertising trust accounts and charging fees in whatever way state laws permit. By setting up trusts in a way that will appeal to small investors and promoting them to the public, banks would be able to market them to people looking for an investment vehicle, according to opponents.

The effect, according to these critics, would be to subordinate the traditional trust aspects of these accounts and put banks into the mutual fund business.

“The proposed rule represents a frontal assault” on congressional restrictions on banks’ activities in the area of stocks, bonds and other securities, said a letter from the Investment Company Institute, a mutual-fund trade group, commenting on the regulations.

The rules offer the potential for a new competitor in the money-management field, one that could offer convenience, efficiency and, based on past performance, outstanding investment value.

At the same time, however, the rules raise the possibility that confused investors, as happened with the failed Lincoln Savings & Loan Assn., will think that they are putting their money into a federally insured deposit when they are not.

The rules have been proposed by the Office of the Comptroller of the Currency, an agency of the Treasury Department that regulates national banks. The OCC is accepting public comments on the issue until July 7 and will then consider whether to make the regulations final.

The proposal has stirred widespread concern on Capitol Hill. Members ranging from House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) to House Energy and Commerce Committee Chairman John D. Dingell (D-Mich.) have written to the regulators expressing concern.

Rep. Edward J. Markey (D-Mass.) and several other members criticized the “granting of Lincoln-type securities powers, with no corresponding safeguards.”

Since the 1930s, the Glass-Steagall Act and other laws have sharply restricted bank activities outside their traditional businesses of taking deposits and making loans. But banks argue that these restrictions are obsolete and hamper their efforts to compete effectively with giant foreign banks. Many bankers would like to get into not only the mutual fund business but also insurance and securities generally.

The OCC’s proposal does not sit well with members of Congress, who view it as an end run.

With questions about the solvency of bank deposit insurance funds and the experience with savings and loans, “Why would you do anything that would add risk?” asked one congressional staff member familiar with the issue. “It just makes no sense.”

Another staffer noted that although trust accounts are not insured, “if these things run amok, are we exposing the deposit insurance fund to a huge liability?”

A spokeswoman for the OCC said, however, that the rules changes are not that dramatic and do no more than put national banks “on a par with state banks,” many of which already have these powers.

At issue in the rules are so-called common trusts, which are investment pools operated by banks so that they can manage relatively small trust accounts efficiently. If a trust account is large enough, it can be managed as a separate entity, but smaller sums would be eaten up by fees if handled separately.

Thus, regulators have for many years allowed banks to pool smaller trust accounts and manage them together.

But trust accounts are more than simple investment vehicles. They involve a fiduciary relationship that requires the bank to manage the money prudently and with only the interests of the beneficiary in mind, much as the trustees of a pension fund must watch over investments on behalf of current and future pensioners.

The new rules would leave most regulation of these funds to the states, which opponents see as tantamount to no regulation at all.

“The proposed rule is intended to convert bank common trust funds from administrative devices into mutual fund vehicles used to sell collective money-management services to the public for a profit,” the Investment Company Institute letter charges.

Some small banks oppose the rules, but other small banks and most big banks want the change. And they dispute the ICI’s charges.

“I only wish (the proposed rules) would let us into the mutual fund business because we want to be in the mutual fund business, but this isn’t the vehicle for it,” said James D. McLaughlin of the American Bankers Assn.

Marketing common trust services “to the masses” would bring banks afoul of the Securities and Exchange Commission, he said.