Group Urges Risk Education on Bank Funds : Consumers: A coalition says it will ask Congress for tough disclosure laws on uninsured investment products.

A coalition of state regulators and consumer groups said Thursday that it will ask Congress to enact tough new federal disclosure laws because many consumers do not realize the risks when they move their savings from federally insured accounts to mutual funds and stocks sold by banks.

Despite extensive publicity, voluntary efforts by federal regulators and savings institutions have failed to educate the public about the potential hazards of uninsured investments, said Craig A. Goettsch, president of the North American Securities Administrators Assn., a group that represents state securities regulators.

“We saw what happened with the outpouring of consumer panic and distrust in the wake of . . . ‘Black Monday,’ ” he told a news conference, recalling the day in 1987 when the Dow Jones industrial average plunged more than 500 points. “And that was when most of the backlash was focused against brokerage firms and investment companies. Now banks have opened themselves up to the same reaction from the public.”

Joining in the demand for strict federal laws were the Consumer Federation of America and the American Assn. of Retired Persons, whose 32 million members are a favorite target of aggressive sales campaigns by financial institutions.

“Many older investors have seen the income from their insured savings accounts and certificates of deposit drastically lowered by plummeting interest rates,” said Lena Archuleta, a board member of the AARP.

“This substantial loss of income has driven many older people into much riskier investments,” she said. “In too many cases, older people have made these investments without fully understanding the risks involved.”

A survey of 1,000 bank customers conducted for the securities administrators group and the AARP showed that only 18% were aware that mutual funds are not covered by the federal deposit insurance that protects savings accounts up to $100,000. Only 25% knew that stocks sold by banks lack insurance, and 14% were aware of the same problem with annuities, which are investment contracts.

Federal insurance protection at banks and savings and loan associations is limited to savings accounts, checking accounts and certificates of deposit.

The sale of uninsured products is a growing, profitable business for financial institutions, which have been under severe competitive pressure. Banks and S&Ls; sold $69 billion worth of mutual funds last year, about 15% of total fund sales, according to Cerulli Associates, a Boston consulting firm.

“Clearly, consumers are unaware that the protections of the Federal Deposit Insurance Corp. shield do not extend to investment products peddled in the lobbies of insured financial institutions,” said Chris Lewis, director of banking policy at the Consumer Federation of America.

“The Congress must take responsibility and move on a fast track to pass safeguards that will ensure that there can be no commingling--in practice or perception--of insured and uninsured activities of banks and thrifts.”

The coalition is seeking a law that would:

* Require every customer to sign a statement indicating an understanding that stocks or mutual funds or annuities lack federal protection and that investors can suffer a loss of principal. A “simple English” document would be used, along with posters in bank lobbies.

* Forbid financial institutions from naming products to cause confusion between insured deposits and investments lacking federal protection. For example, First National Bank could not market a First National Bank Stock Fund.

* Establish the same safeguards enjoyed by customers of brokerage firms, including disclosure of fees and discussion of a customer’s “suitability” for a particular investment. For example, an aggressive growth stock fund should not be sold to a 75 year-old retiree.

* Require physical separation of the sale of products. “No bank should be able to sell insured and uninsured products from the same desk, window or lobby area,” the coalition said.

Meanwhile, the bank and thrift industries want to head off any congressional action through a plan for self-regulation.

Six trade groups representing banks and thrifts plan to announce guidelines next month to make certain that “consumers understand what they’re buying,” said Donald G. Ogilvie, executive vice president of the American Bankers Assn.