Regulation of Bank and Thrift Mutual Fund Activities

The mutual fund activities of banks and thrifts are subject to a number of federal and state securities and banking laws and regulations—and to the shared oversight of a variety of federal and state securities and banking regulators. Our objectives were to (1) determine the extent and nature of bank and thrift involvement in mutual fund sales, (2) assess whether the sales practices followed by banks and thrifts provide bank customers adequate disclosures of the risks of investing in mutual funds, and (3) analyze whether the existing framework for regulation and oversight of bank and thrift mutual fund sales practices and proprietary fund operations adequately protects investors. Growth of Proprietary Funds Has Outpaced the Industry as a Whole

As of December 31, 1993, about 114 bank and thrift companies had established proprietary mutual funds. This figure includes both proprietary and nonproprietary funds sold through banks and thrifts. Inadequate Disclosure of Risks Associated With Mutual Fund Investing

In response to the rapid growth of sales of mutual funds by banks and concerns that bank customers may be confused or ill-informed about the differences between mutual funds and traditional bank products, the federal banking regulators have increased their regulatory and supervisory oversight of banks’ mutual fund sales activities. During our visits to the institutions we found that these employees complied with statements in the guidance about not providing investment advice. In February 1994, the four regulators jointly issued the “Interagency Statement on Retail Sales of Nondeposit Investment Products.” This new guidance superseded the guidelines previously issued and unified the guidance to banks and thrifts on the policies and procedures that they should follow in selling mutual funds and other nondeposit investment products. This creates a potential for different regulatory treatment of the same activity and a potential for conflict and inconsistency among banking and securities regulators. On the basis of these responses, we estimate that about 180 of the 2,300 banking institutions that were selling mutual funds to their retail customers at the end of 1993 did so directly using only their own employees.
Why GAO Did This Study

Pursuant to congressional requests, GAO reviewed bank and thrift sales of mutual funds, focusing on: (1) the extent and nature of bank and thrift mutual fund sales activities; (2) banks' and thrifts' disclosure of their mutual fund sales practices; and (3) the regulatory framework for overseeing bank and thrift mutual fund operations.

What GAO Found

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.