Bank Mutual Funds

At the end of 1993, about 114 banking institutions had established their own families of mutual funds with assets of more than $219 billion. In addition, banks and thrifts have become major sales outlets for other companies' funds. This rapid growth in sales of mutual funds by banks has raised concerns that customers may not understand the risks of mutual fund investments compared to insured deposits. In February 1994, the four banking regulators issued guidelines that banks and thrifts are to follow in selling nondeposit investment products, such as mutual funds. However, GAO found that many institutions are not following the guidelines. Only about one-third of the institutions GAO visited made all the risk disclosures called for by the guidelines, and about one-third did not clearly distinguish their mutual fund sales area from the deposit-taking area of the bank as required by the guidelines. The current regulatory framework allows banks to choose how to structure their mutual fund sales and advisory activities and, depending on that structure, how they are regulated. As a result, banks can opt to sell mutual funds directly to their customers and be subject to oversight by the banking regulators, but not by securities regulators. This creates the potential for different regulatory treatment of the same activity and a potential for conflict and inconsistency among different regulators.

GAO found that: (1) as of the end of 1993, about 2,300 banks and thrifts were involved in mutual fund sales and about 114 institutions had established their own mutual funds; (2) during the 5 previous years, the value and numbers of bank-owned funds grew faster than the mutual fund industry as a whole and banks and thrifts became major sellers of nonproprietary funds; (3) banks and thrifts sell mutual funds to retain customers and increase fees; (4) in February 1994, bank regulators issued guidelines on policies and procedures that financial institutions are to follow in selling nondeposit investment products due to their concern that banks and thrifts are not disclosing the risks of investing in mutual funds; (5) GAO visits to selected banks and thrifts in 1994 disclosed that only about one-third of the institutions followed the disclosure guidelines, while nearly one-fifth of the institutions failed to disclose any risks; (6) the bank regulators are including steps in their examinations to assess how well these institutions are complying with the guidelines; (7) the existing regulatory framework is inadequate to deal with the rapid increase in banks' and thrifts' involvement in securities sales and management; (8) banks that directly sell to customers are predominantly regulated by bank regulators, while securities regulators mainly oversee banks which sell or advise through affiliates or third party brokers; (9) the existing regulatory framework could lead to inconsistent or overlapping regulatory treatment of the same activity and to conflict among the regulators; and (10) conflicts of interest may arise between banks' mutual fund activities and traditional banking functions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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