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and the integrity of financial markets cannot be overemphasized. States one securities industry analyst: "This deal has the potential to have a greater impact on the bank investment market than any previous merger. It's unprecedented."?

Mr. Chairman, CFA appreciates the seriousness with which you view the legal and public interest implications of this merger. It is our hope that the Subcommittee's hearings will focus the attention of regulatory officials on the need to keep the public interest not the bankers' interest foremost in their mind when they review industry demands for increased securities powers for insured financial institutions.

BACKGROUND

Over the past two decades, creative interpretations of the Glass-Steagall Act by banking regulators have permitted vastly expanded bank involvement in the mutual fund and other securities business activities. This Committee certainly does not need to be reminded that the erosion of the distinction between commercial and investment banking -- ushered in by the banking industry's regulators does not represent a new way of conducting the very old business of banking. These are wholly distinct financial activities.

CFA believes that the current headlong rush by the banking industry into the retail mutual fund business must be placed in proper perspective.

First, there is no known clamor by consumers for further expansion by banks into the mutual fund business. CFA monitors consumer demands nationwide and the organization is not aware of a consumer push for more mutual fund outlets whether operated by banks or other entities. Similarly, we are unaware of consumers knocking on the doors of the Congress in demand for bank operated mutual funds.

Second, we are aware that the banking industry enjoyed record setting profits last year, as in the previous year, and there seems to be no emergency need to open new lines of business to protect the earnings of the industry.

Third, we are aware -- through both government and private surveys -- that there is widespread confusion among the public about the nature of risk associated with investment products, including mutual funds, sold by banks and bank subsidiaries.

Finally, the Congress, through bills introduced by Chairman Dingell and Chairman Gonzalez, are attempting to establish specific

? Securities Marketing News, February 25, 1994, p.2.

statutory guidelines to end the confusion among the banks and the regulators and most importantly among the public.

A TARNISHED FDIC SHIELD

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Last year, the banking industry, with the shield of the Federal Deposit Insurance Corporation (FDIC) displayed prominently in every bank, peddled $92 billion of mutual funds to an unwary public.

The banks' sales practices, we believe, are all too often designed to lead the unsuspecting customer into believing that good-ole Uncle Sam

and the taxpayers guaranteeing the investments. The funds like all investments in the stock market

carry risk and none of that risk is insured or protected in any manner by the Federal government.

In short, Mr. Chairman, the protective shield of the Federal Deposit Insurance Corporation (FDIC) symbol of security for millions of American consumers is being tarnished by bankers hell-bent on becoming big-time players in Wall Street's mutual funds and annuities market.

The banking industry, as well as the Congress and the American public, should want that shield protected. Certainly, the full faith and credit of the United States taxpayers symbolized by that FDIC logo -- should not be utilized by the banks as a means directly or indirectly -- of duping customers into believing that investments in the stock market are risk-free. There should be no question about what that shield protects and what it does not protect.

CONSUMER CONFUSION REIGNS

Little wonder, then, that unsuspecting customers .. lulled into a false sense of security by decades of fail-safe insurance for their deposits walk out of banks thinking their investments are risk-free.

In January, a survey released by the American Association of Retired Persons (AARP) and the North American Securities Administrators Association (NASAA)' revealed that 82% of American consumers are unaware that mutual funds sold through banks are not insured by the FDIC. Ironically, the AARP survey found that consumers who have actually purchased mutual funds at their bank are even less well informed about the risks associated with such investments than are other bank customers.

Bank Investment Products Survey: January 1994.

Last November, the Securities and Exchange Commission released survey data that found similar levels of confusion among bank customers concerning the uninsured status of mutual funds sold by banks.

The fact is that consumers are not well informed about the risk of investment products peddled by banks. We need not conduct further studies to determine that there is a serious problem in the lobbies of insured financial institutions.

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Bank marketing efforts

clearly adding fuel to

the firestorm of confusion. A recent report of the New York City Department of Consumer Affairs revealed that only 40% of surveyed banks stated that mutual funds were not FDIC insured. The report also observed far more aggressive sales tactics by banks compared to that of mutual fund companies:

"Generally, the bank representatives gave a much harder
sell than the fund company representatives, perhaps
because the bank agents earn commissions, while the fund-
company agents generally do not. For example, agents from
both Citibank and Chase were hesitant to give information
over the phone or through the mail, but particularly
eager to have the undercover Consumer Affairs
investigator who phoned come into the office for a face-
to-face sales presentation. Without understanding much
about mutual funds, face-to-face sales presentations can
be intimidating to new investors.
Furthermore, bank customers who become first time mutual-
fund buyers are generally more cautious and conservative
than those more familiar with the territory. But few bank
employees selling mutual funds pushed conservative
investments.. (A)11 of the five bank representatives
pushed the higher-yielding, and more risky growth funds
rather than the more conservative bond funds."S

Most recently, Consumers Union reports in the March 1994 edition of Consumer Reports that consumers can expect that "the odds of getting good advice at a bank that sells mutual funds are worse than 1 in 6".

• Making Sense of Mutual Funds: Tricks of the Trade and Lessons for Investors: August 1993.

Making Sense of Mutual Funds: Tricks of the Trade and Lessons for Investors, pgs. 29-30.

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Should You Buy Mutual Funds From Your Bank?: Consumer Reports, March 1994, p. 148.

80-222 0-94-9

REGULATORS RESPONSE

The response by the bank regulatory agencies to the rising tide of securities activity by depository institutions has been a classic example of those agencies age-old approach "banks first and consumers last".

Consumer

In essence, the regulators have suggested that safeguards are just fine so long as the protections don't interfere with the banks' headlong rush for profits.

Last month the Washington Post, quoting data collected by the American Bankers Association, noted that the four agencies had produced four different

about the seriousness of the confusion created by mutual funds bearing the identical or similar name of an insured bank.

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Two weeks ago the agencies -- faced with mounting publicity and with the prospect of action by this Committee and the Banking Committee finally decided that they were all part of the same government and came up with an "Interagency Statement" on retail sales of non-deposit investment products.

What has emerged in this "policy" statement is a set of lowest common denominators with "should" not "shall" the dominant

verb.

I quote the regulators:

"Moreover, sales activities involving these investment
products should be designed to minimize the possibility
of customer confusion and to safeguard the institution
from liability..."

In a number of critical areas the "Interagency Statement' does not correct egregious practices. Rather, it institutionalizes them.

For example, on page 8 of the statement, the regulators endorse the use of promotional brochures and advertising where both uninsured and insured products are advertised together.

The agencies only suggest that the material "clearly segregate" the information. What does this mean? Two space between the two distinctly different products or on separate pages of the same brochure ?

This is reckless guidance. The two products - insured and uninsured -- should not appear in the same advertisement or in the same promotional brochure. No segregation within the same document or the same advertisement on television on in newspapers will do the job it only ensures more confusion for the investing public.

And when it comes to the big problem of "name" the use of an insured bank's logo or name the agencies again take the easy way out. A "similar" name should be used, the regulators say, in a sales program "designed to minimize the risk of customer confusion". In short, bankers can be creative in duping customers

be a little subtle in sliding that FDIC logo in front of the mutual fund customer.

The separation has to be total .- no similarities or the regulation is a further fraud on the public.

On the critiacl matter of the separation of personnel, the agencies provide a road map for the banks to make full utilization of personnel across the lines of insured and uninsured products.

The interagency statement allows personnel which handle insured deposits to "recommend" investment products so long as they have "reasonable grounds for believing that the specific product recommended is suitable for the particular customer on the basis of information disclosed by the customer."

Translation: you don't need separate personnel and if this confuses the public about government insurance, too bad.

And if this is not enough, the tellers to be allowed "nominal fees" to encourage the referral of customers for nondeposit investment products.

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So what happens to an elderly consumer when she walks in to the bank seeking a safe place for the $50,000 she has just earned in the sale of her house? Does the teller -- with the thoughts of a referral fee at hand -- urge her to forego government insurance and, instead, invest in some of those nice securities being sold at the desk across the lobby?

And if this happens, how do the examiners and the supervisors really detect the game? The answer, we believe, is that in most cases they won't.

In short, the regulators have failed to face up to the realities of the problem. While the banks have roared forward and while the consumer has been left in a sea of confusion about government insurance, the regulators continue

to encourage questionable practices by the banking industry dangerous practices that put hard-earned savings of consumers at risk when the consumers had no intention of placing their funds at risk.

Caught playing fast and loose with the Government's insurance the banking industry is rushing its lobbyists to Capitol Hill and to the media in an attempt to convince everyone that the answer is "self-regulation".

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