Bankers Peeved Over NASD Mutual Fund Plan : Investing: Brokers call the new sales rules costly and unfair. The association says they are needed to protect customers.

Bankers have come out strongly against a National Assn. of Securities Dealers proposal to regulate the way they sell mutual funds, saying the rules are unfair and overstep the group’s authority.

The proposal, released for comment in December, elicited the largest response the NASD has ever received for a rule-making proposal, a spokesman said. More than 300 bankers and representatives of brokerages that sell mutual funds at banks inundated the NASD earlier this year with 1,000 pages of mostly negative comments about the group’s proposal to become a primary regulator of bank brokers.

The objections came from small community banks and big New York financial institutions. Many asked the NASD to withdraw the rules, which place severe restrictions on some aspects of bank mutual fund sales.

Banks have come under scrutiny following customer complaints of misleading sales practices. Customers have claimed that brokers did not make it clear that mutual funds are not federally insured and that investors can lose money if the funds do not perform well.

The NASD, a self-governing body that sets professional standards for brokers, says the rules would protect customers. In their comments, released by the NASD in response to a media request, bankers say the rules are redundant, would be costly to implement and discriminate against bank brokers.

The rules would prohibit banks from letting brokers sell funds near teller windows, restrict non-licensed bank employees from getting involved in sales and receiving bonuses for some referrals, and require banks to register branches as brokerage offices.

The rules would also prohibit bank brokers from using bank customer lists to prospect for sales, and they would prohibit banks from putting their logos on ads for mutual funds.

“I don’t think NASD has the jurisdiction to direct our behavior,” Robert H. Halleck, president at Maryland Federal Savings & Loan, told the Washington-based group in a letter. “The present rules we have are enough of a burden and afford our customers adequate protection.”

The proposal comes amid drooping sales of mutual funds at banks. Sluggish financial markets and the conservative investing habits of bank customers caused banks’ share of overall fund sales to fall to 11% last year from 15% in 1993, according to a study by Cerulli Associates Inc., a Boston research and consulting firm.

Bankers fear that the NASD regulations would hamper their ability to strengthen sales by removing key marketing tools, such as using customer lists and giving bonuses to employees for referrals, and requiring costly changes to operations.

They also say the rules are unfair because they target bank brokers for special restrictions and go beyond the NASD’s scope of jurisdiction by attempting to regulate banking operations.

“Several . . . provisions reflect an actual intrusion into bank regulation,” said Richard M. Whiting, senior director for regulatory affairs and general counsel at Bankers Roundtable, an association representing 125 large banks.

“Such provisions would exceed NASD’s legal authority,” he said.

NASD officials have denied that the group is trying to regulate banks, saying the rules apply only to their brokerage subsidiaries. But they say bank brokers should be subjected to special rules because bank customers are unsophisticated investors and may not understand the difference between mutual funds and traditional bank products.