Bank Mutual Funds:

Sales Practices and Regulatory Issues

GGD-95-210: Published: Sep 27, 1995. Publicly Released: Oct 27, 1995.

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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.

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 for Executive Action

  1. Status: Closed - Implemented

    Comments: In June 1996, discussions with OTS officials related to work done on 233504 (a followup on bank sales of mutual funds) disclosed that OTS participates in an interagency group with other banking regulators to coordinate regulatory and policy issues pertaining to sales of mutual funds and other non-deposit bank products. In addition, OTS was a signatory of a January 1995 Agreement in Principle with NASD to share examination information.

    Recommendation: The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency should work together to develop and approve a common approach for conducting examinations of banks' mutual fund activities to avoid duplication of effort and conflict, while providing efficient and effective investor protection and ensuring bank safety and soundness.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  2. Status: Closed - Implemented

    Comments: In January 1995, OCC entered into an agreement with NASD to share examination schedules and to coordinate examinations of depository institutions that have affiliated broker-dealers. During 1995, OCC, the Federal Reserve, FDIC, OTS, and NASD formed an informal working group to promote consistency in regulatory standards related to mutual fund advertising and promotional materials. OCC and SEC agreed in June 1995 to conduct joint examinations of bank subsidiaries that provide advice to mutual funds. Four joint examinations have been completed and more are planned.

    Recommendation: The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency should work together to develop and approve a common approach for conducting examinations of banks' mutual fund activities to avoid duplication of effort and conflict, while providing efficient and effective investor protection and ensuring bank safety and soundness.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  3. Status: Closed - Implemented

    Comments: FDIC, along with OCC, OTS, and the Federal Reserve, entered into an Agreement in Principle with NASD to share examination information and open channels for ongoing communication on regulatory and policy issues. During discussions in June 1996 with FDIC officials on work related to job code 233504, GAO learned that FDIC is working with OCC, the Federal Reserve, and securities self-regulatory organizations on a regulation to require bank employees selling mutual funds to meet the securities industry's basic qualification and registration requirements, and is coordinating with SEC and NASD on another proposed rule change.

    Recommendation: The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency should work together to develop and approve a common approach for conducting examinations of banks' mutual fund activities to avoid duplication of effort and conflict, while providing efficient and effective investor protection and ensuring bank safety and soundness.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: The Federal Reserve and the National Association of Securities Dealers (NASD) agreed in January 1995 to coordinate the scheduling and conduct of examinations of bank affiliated broker-dealers selling mutual funds and other nondeposit investment products on depository institution premises. Since then, Federal Reserve and NASD examiners have worked together on several examinations. In addition, procedures have been instituted to refer violations of bank and securities laws to the appropriate agency to improve supervision and eliminate unnecessary duplication of inspection effort.

    Recommendation: The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency should work together to develop and approve a common approach for conducting examinations of banks' mutual fund activities to avoid duplication of effort and conflict, while providing efficient and effective investor protection and ensuring bank safety and soundness.

    Agency Affected: Federal Reserve System

  5. Status: Closed - Implemented

    Comments: SEC has been working with the federal banking regulators to conduct joint examinations of entities in which SEC and the banking regulators each have regulatory and supervisory interest. In May 1995, SEC and OCC agreed on a framework for conducting joint examinations of banks that advise mutual funds, and the funds themselves. Since then, four joint examinations have been completed, and others are planned.

    Recommendation: The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency should work together to develop and approve a common approach for conducting examinations of banks' mutual fund activities to avoid duplication of effort and conflict, while providing efficient and effective investor protection and ensuring bank safety and soundness.

    Agency Affected: United States Securities and Exchange Commission

 

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