Bank Mutual Funds

In recent years, sales of mutual funds through banks and savings and loans have soared. According to information reported to the Federal Deposit Insurance Corporation (FDIC), about 2,800 banks sold more than $40 billion in mutual fund shares during 1995 alone. Because it is well-known that bank and thrift deposits are federally insured, customers buying investment products from banks and thrifts need to understand the difference between FDIC-insured investments, such as money market deposit accounts, and uninsured investments, such as money market mutual funds. In early 1994, FDIC, the Office of the Comptroller of the Currency, the Federal Reserve, and the Office of Thrift Supervision jointly issued guidelines to banks and thrifts requiring that customers be fully informed of the risks of investing in nondeposit investment products. The guidelines also call for the mutual fund sales areas in financial institutions to be physically separated from the deposit-taking areas. In 1995, GAO reported that many banks and thrifts were not adequately informing potential investors of the risks of investing in mutual funds. GAO based this conclusion on the results of its "secret shopper" visits to 89 banks and thrifts in 12 cities in 1994. GAO also found that more than one-third of the institutions did not clearly separate the mutual fund sales areas from the deposit-taking areas. This testimony focuses on FDIC surveys that reaffirm GAO's findings on banks' and thrifts' inadequate disclosure of the risks associated with investing in mutual funds.