Booming Mutual Fund Sales at Banks Raise Fears of Deception : Finance: Lawmakers introduce legislation to tighten regulation to protect investors who may not understand risks.


As senior citizens, Ruth Calcaterra and Jean Abrams have plenty of worries. Illness. Crime. Rising prices. The shriveling interest they earn on their bank savings.

But they were mystified when their banks proposed they put the money into mutual funds.

“I wasn’t sure if it was safe. But they said, ‘We wouldn’t offer it if it wasn’t safe,’ ” said Calcaterra, 74, shrugging as she and other volunteers pasted labels on envelopes at a Manhattan senior citizens’ center.

Abrams, 68, a white-haired retiree in blue jeans, said her banker pledged that “since (a mutual fund) is shares in a company, it’s just as safe” as federally insured deposits.


“The whole thing wasn’t presented in a way I could understand,” she said, her voice rising in exasperation. “I’m just a lay person.”

As a financial revolution sweeps the nation’s households, turning millions of people into investors, concerns are growing that unsophisticated bank customers could unwittingly be risking their savings.

Regulators and consumer advocates fear that such customers, especially the elderly, will mistakenly believe the investments are as safe as federally insured deposits, since they are from a bank.

“When the market turns down . . . there are going to be a lot of customers of banks saying, well, we didn’t know our principal was at risk,” said Kenneth Guenther, of the Independent Bankers Assn. of America, which represents small banks.


Worse, regulators say, some banks are contributing to the confusion--printing unclear ads, slapping a version of the bank’s name on a mutual fund or failing to keep tellers from dispensing wrong information.

The concern is so great that three bills have been introduced in Congress to intensify regulation of bank sales of mutual funds.

“We cannot trust that banks’ self-policing practices will avert another tragedy like the Lincoln Savings & Loan debacle,” said Rep. Henry B. Gonzalez (D-Tex.), a sponsor of one bill. In that case, thousands of investors lost savings after buying bonds they thought were insured.

While Calcaterra and Abrams decided not to invest in the mutual funds, millions of other savers are doing so. According to the most recent data, in the first half of 1992, about 14% of the $200 billion in stock and bond mutual fund sales went through banks--up from virtually zero a decade ago, according to the Investment Company Institute, a trade group.

Banks say they are forced to offer mutual funds, which pool money from investors to buy stocks, bonds and other securities.

“The world has changed,” said Guenther. “More and more people are looking at the yields on traditional (bank) investments . . . and saying, ‘We want something different.’ ”

It’s not necessarily a bad idea. Mutual fund sales may strengthen banks, which were long barred from many investments by Depression-era laws. Banks can also provide investors with advice and convenience. But critics say safeguards are lacking.

At a recent convention, Comptroller of the Currency Eugene Ludwig sternly told hundreds of dark-suited bankers that some were failing to emphasize that mutual funds weren’t insured.


Holding up one bank’s brochure, he demanded, “Where are the disclosures we asked for?” He flipped it over. “Buried in tiny type on the back.”

The comptroller has also barred banks from using their names on mutual funds, to minimize customer confusion. But many banks are using look-alike names.

For example, Charlotte, N.C.-based NationsBank Corp. has the Nations Fund. Crestar, a bank based in Richmond, Va., offers the CrestFunds. PNC Bank Corp. provides--you guessed it--the PNC Funds.

Jonathan Williams, a spokesman for Pittsburgh-based PNC, said, “Great efforts are made in an attempt to ensure there is no confusion between the bank and the funds.”

Some bank employees themselves still don’t understand mutual funds. At a Greater New York Savings Bank branch in Brooklyn, signs at the tellers’ windows urge customers to speak to the investment specialist.

Asked if the mutual funds were federally insured, a teller responded, “Yes.” She then directed a reporter to the specialist--who stated that they weren’t.

Some critics fear abuses stemming from the practice of paying sales incentives to tellers and other bank employees involved with mutual funds.

“If you (reward) people on volume, you’re going to get sales people selling as though there is no risk,” said Paul H. Allen of Aston Limited Partners, a bank restructuring firm.


Bankers insist that more regulation isn’t the answer, especially when they are struggling to compete with investment and finance companies.

“The industry is getting the message,” said Chris Rieck, a spokesman for the American Bankers Assn. He pointed out that four federal agencies and six bank trade associations have already issued guidelines on banks’ sales of mutual funds.

To be sure, many banks are taking precautionary steps, such as having customers sign a statement that their mutual funds aren’t insured.

BankAmerica’s investment subsidiary goes as far as sending “secret shoppers” to bank branches to check up on employees.

“The bank would not be doing it (mutual funds) if it were going to jeopardize its reputation over the long term,” said Greg Berardi, a spokesman for BankAmerica Corp.

But a recent study by the Securities and Exchange Commission found that nearly one-third of bank mutual-fund customers believed erroneously that the investments were federally insured.