agree with what the regulators are proposing or would you
Ms. Canja. I think it is a step in the right direction. One of our
recommendations, for example, is to send testers into bank lobbies,
and the FDIC said that they have a plan to do this, and we
thought that was wonderful, but we would like to see it with a
strong backing of congressional mandate.
Chairman Neal. Well, let me ask you all about this. There was
a point made by the bankers and the regulators, I think, that this
industry has evolved and the products offered by the banking in-
dustry are evolving and the products offered by the securities in-
dustry, and they are evolving and changing almost daily. It is a dy-
namic. We live in a very dynamic kind of economy, and we encour-
age those kind of changes, creativity, and so' on in the marketplace.
The worry about legislation is that it would freeze into place a
set of particular proposals and that the marketplace would change
and the needs would change and so on, so both the regulators and
the bankers argue for regulations which they spelled out in detail,
and they favor the regulations because they could be changed with-
out going through the whole legislative process again.
Is that a sensible proposition or not?
Mr. Feigin, I guess I would say Glass-Steagall is a law, too. It
seemed to freeze things in place, but we had a bit of a thaw over
the last 10 years.
An organic bill provides the sufficient latitude in a regulatory en-
vironment and provides rulemaking authority to somebody who can
enforce it; that is not a particular concern of mine. I have not seen
any of the activity that would not be accommodated by the securi-
ties law but for an historical exclusion whose purpose may have
long since expired. That is the exclusion of banks from the defini-
tion of broker dealer.
Mr. Lewis. I might just add to that, Mr. Chairman, the legisla-
tion that the committee chairman has introduced intends to estab-
lish basic common standards for the sale of uninsured products,
and leaves to the discretion of the regulatory bodies the terms of
exactly how those standards are put into play in the marketplace.
And certainly, as we saw with the witnesses from the regulators
this morning, they are going to, on an ongoing basis, continue to
identify problems and address it under their existing authority.
But we do feel there needs to be a common set of standards that
consumers can expect to enjoy wherever they enter the investment
Chairman Neal. Ms. Canja, did you want to comment?
Ms. Canja. One other comment, possibly, and that is that the
standards — you know, some banks are abiding by them right now.
They are setting standards themselves. And I guess what we would
like to see is all the banks following suit.
Chairman Neal. That is what the regulators say they are inter-
ested in. Do you think that would be adequate? That is all right.
I think I have got your response.
Let me ask you, if I may, Ms. Colasanto, a question came up a
little earlier about — well, I think it was the American Association
of Retired Persons' survey showed that a high percentage of people
didn't know that mutual funds offered by insured institutions were
not insured, and your research indicates the same sort of mis-
understanding, I think.
Ms. Colasanto. That is correct. This is a survey, by the way,
that we did conduct on behalf of AARP and NASAA.
Chairman Neal. So it is the same survey?
Ms. Colasanto. I believe it is the same survey.
Chairman Neal. Someone else said that they understood not
only is what you just discussed true, but also a large percentage
of people who invest in mutual funds outside the banking system
think that those mutual funds are insured. Could you get into that
question at all?
Ms. Colasanto. Our survey looked specifically at perceptions
about mutual funds sold by banks, and we were very careful in
how we structured the questionnaire that respondents would know
exactly which institutions, in other words, their own institution, we
were talking about.
One thing we did in our analysis that may be the thing that was
referred to is, we looked at people who also had relationships with
other kinds of securities dealers, in other words, had invested out-
side of the banking environment to see maybe they were a little bit
better informed than people who were dealing exclusively with
banks, and what we found was there was a difference in percep-
The people who we labeled more sophisticated investors had bet-
ter information about the fact that mutual funds sold at banks
were not FDIC insured, but even there, it was still a minority of
even that sophisticated group knew they are not insured. It was
different than all the other bank customers we looked at, but still
not a majority — you know, at least a majority saying, No, those
products aren t insured.
But the products they were talking about were not the products
sold elsewhere. They were the products sold at their bank.
Chairman Neal. This is not an entirely fair question and I don't
expect you to be an expert on this, but I was just wondering if you
formed an opinion, just listening to the testimony, whether or not
you think that what the regulators are suggesting would be enough
to inform people that their mutual fund investments aren't insured.
Ms. Colasanto. You are right, that is really not anything I can
answer. What I can tell you is what the state of consumer percep-
tions are right now, and that there is a tremendous amount of con-
fusion out there.
Chairman Neal. I am trying to get at what it would take to cor-
rect that. I have been told, I don't know if it came up today or not,
but often people will sign statements saying that they know that
a product is not insured and then later if you ask them, they will
say, "No, I thought it was insured."
Ms. Colasanto. In fact, we found that in our survey, people
said, I got this disclosure and I read it, and they are the same peo-
ple who are not paying attention to that particular form of disclo-
sure. That was a very
Chairman Neal. It is hard to know how to correct that, isn't it?
What would you do in a case like that?
Mr. Feigin. If I may, sir, we have found in a lot of our examina-
tions that the customer folders of investors, of people who invested
through banks, have disclosure statements in them. I don't know
if you ever sat through that. I refinanced my house a couple of
months ago. I signed a dizzying array of things, some from the
EPA, some from tne bank — and I am a lawyer. I didn't read them.
I think when people are convinced that they want to buy some-
thing because they are going to be richer, the idea of signing tech-
nical disclosure forms is not particularly exciting nor does it draw
I use the example in some speeches I give that I ask the audi-
ence, have you ever rented a car? They say, oh, yes. I say, do you
ever read the rental agreement, I mean really read it? No. Why?
Because you want to get in your car and drive away. That was the
document written by the car-leasing attorneys.
So the point is we found that documents are used more as a
sword to protect the institution than they are to inform the inves-
Chairman Neal. Might a possible solution be to require a state-
ment on a full-size sheet of paper attesting to the fact that a person
understands that mutual funds are not an insured product and
that — maybe repeat and say, notwithstanding whatever else I may
have been told. Might that adequately inform?
Mr. Feigin. I think what has happened is that securities regu-
lators and perhaps others have tended to react based on past expe-
rience. The answer has always been another disclosure form, or
perhaps move them another 10 feet that way or something like
that. I am not sure we know yet what disclosure or what mecha-
nisms will work to overcome the FDIC insurance and now perhaps
the SIPC insurance issue.
What we propose to do is to do pilot studies and really find out
what works. It may be as simple as the international sign with the
line through it. It may be far more complicated. It may be imposing
a requirement as part of the suitability requirements on securities
salespeople that they have made an unsuitable trade if the cus-
tomer leaves thinking the investment is FDIC insured.
I think we have to use our imaginations and come up with what
works instead of just applying full solutions that may not.
Chairman Neal. I wish you would share whatever you learn
with us, because
Mr. Feigin. We certainly will.
Chairman Neal. It seems to me like a fairly simple issue. If we
just solve this one problem, if people could clearly understand what
it is that they are doing, then it ought to be — the person ought to
be able to make an informed choice without reams of regulations.
It is not a complicated issue, is it?
Mr. Feigin. Certainly, banks were not popular entities in 1929
and 1930. I think the goodwill that has been established over the
years is based in large part on the fact that you save at the bank
and you go over and invest and gamble and speculate with the
broker. And that has really built up a real social institution in the
minds of Americans. And we are finding that a very difficult thing
And the flocks of people who are buying investments at banks
are being targeted by banks and the public relations firms they
hire. And I think it may be a stickier thing to try and overcome
than we have been able to — than we have identified yet. We have
to find new ways, because they are still confused.
Chairman Neal. Just one question, then I will quit. Did you no-
tice anything in your research, Ms. Colasanto, that would suggest
why some people understood and some didn't?
Ms. Colasanto. No, there weren't any clear indications of why
some people got the message clearly and some didn't. As I men-
tioned in my statement, there were some relationships with edu-
cation; better educated people tended to get the message a little bit
more often than others, but even among people who were college
graduates, most had it wrong. So we really didn't have any clear
sense of who was getting the message and why.
Chairman Neal. Back to this point you were making, Mr. Feigin,
it would seem to me almost — there was something pejorative sug-
gested when you suggested a bank would try to convert a person
from savings to a mutual fund. Is that your feeling about it?
Mr. Feigin. I think what is important — and let me highlight
what that brief statement was meant to address. We have seen in
a couple of our actual enforcement cases that — and I harken back
to a point I mentioned that I haven't heard discussed much, and
that is the fact that banks are identifying to their brokerage sub-
sidiaries the names of customers whose certificates of deposit are
maturing. That customer is being called in the evening by so-and-
so who says, I understand your certificate of deposit is maturing;
I thought you might be interested in some instruments that offer
a higher interest rate. Why don't you come see me at the bank
That is all that is needed. That person walks in, sits down at a
desk that is in some cases indistinguishable from others, and the
sale is made long before they ever hit the chair, because they are
so convinced that the bank has done it.
So the bank is not doing anything to deter — as a matter of fact,
I think in that scenario they are encouraging that customer to be-
lieve that it is the bank selling them a product, and with that
comes the unconscious reaction that, of course, it must be insured.
If that person knows my confidential personal financial informa-
tion, they must be affiliated with the bank, because how else would
Chairman Neal. You know, that issue, we are going to look into
it. It would suggest that banks can sell all this information. I am
surprised to learn that myself, if that is in fact the case. We are
going to look into that. It doesn't seem quite right to me, either.
As far as using it internally, that is a little bit of a different situ-
ation. Personally, it is hard for me to see anything wrong with
Plus, by the way, if you were to go back and look — if the propo-
sition is that you want to improve a person's financial status, how
would you be better off? Would you have been better off 5 years
ago, 10 years ago, 20, 30, 40, any period you pick in history, al-
most? Would you have been better off putting your money in a
bank account or putting that same amount of money in a mutual
fund? If you go back almost any time in history, you would have
been considerably better off putting your money in a mutual fund
than you would have been putting it in a bank account.
I guess that is why you are not necessarily doing something not
in the customer's best interests to suggest that their money would
be better off in a mutual fund.
Mr. Feigin. Absolutely not. The question is, what degree of risk
are you willing to tolerate. I think we have convinced the American
public that putting $100,000 in a bank is an absolute certainty.
There is very little gain right now, but there is virtually no risk.
It is taking the choice.
Taken to an extreme, if I put my paycheck into lottery tickets
and just happen to win, then that return would be fabulous. But
was I willing to risk the loss of my paycheck? No.
And it seems that the success of banking and deposit insurance,
on the banking side, anyway, has been mat as long as interest
rates were competitive, people were much happier being insured
than they were here.
Chairman Neal. Of course, even that appears to have broken
down, because so many — I mean, huge, trillions of dollars have
gone into uninsured instruments. So at least a sizable portion of
Mr. Feigin. As I said, we are not opposed to the sale of securities
at banks. We think it has to be fair and legal. We are not opposed
to the marriage of banks and securities. We are just a little bit con-
cerned or we are trying to make sure that they don't sleep in the
same bedroom, I guess.
Chairman Neal. I don't think there is frankly any disagreement.
If a person is informed and then can make an informed decision,
then they ought to be able to make that decision. Isn't that right?
Isn't that what you think?
Mr. Feigin. It is how to enforce that information, or the convey-
ance of that information. That is the key.
Chairman Neal. That is what we are trying to get at.
Mr. Feigin. What mechanism will give the greatest assurances
of it? We have a fully established discipline of securities regulation
to see to just that. And the question is, are we going to try and
create a new one.
Chairman Neal. An ad like this was able to be produced and dis-
tributed and so on. It is very deceptive. It is not the only one; I
imagine there are quite a few.
Mr. Feigin. We subscribe to every newspaper in Colorado and
look at the ads every day to see if they are deceptive.
Chairman Neal. Do you find any that are? You must, or
Mr. Feigin. Occasionally. But the idea is those things are offered
on those higher rates in the absence of an FDIC logo or the word
"bank" or anything like that. People should know it is like going
to a casino, because it is not an FDIC-insured bank. If they know
they are going to a bank, they are usually getting a different type
of product. It is when the two overlap that I think is the problem
we are concerned about.
Chairman Neal. Any other comments? Anyone else?
Anyway, thank you all very much. We appreciate your coming.
The subcommittee will stand adjourned.
[Whereupon, at 2:25 p.m., the hearing was adjourned.]
March 8, 1994
STATEMENT OF CHAIRMAN STEPHEN NEAL
Subcommittee on Financial Institutions Supervision, Regulation, and Deposit Insurance
House Banking, Finance, and Urban Affairs
March 8, 1994
It is a pleasure to welcome all of you here this morning. Today the Subcommittee
examines the sale of mutual funds by financial institutions.
Banks, through their trust departments, have always been involved with mutual funds,
using such funds for investment purposes for trust assets and serving as investment advisors to
Today, however, banks and thrifts have increased their involvement with the retail sale
of mutual funds in order to retain customers seeking higher returns on their deposits, as well as
to boost fee income. In fact, a recent American Bankers Association survey indicated that 43.8
percent of banks believe selling mutual funds is a high priority, and of those banks that are
losing depositors, more than 65 percent said they are losing them to mutual funds.
According to one industry analyst, about 3000 financial institutions sell mutual funds,
and the sale of mutual funds through banks and thrifts totaled $409.3 billion for the first half of
1992, the most recent figure available. This figure represents 33 percent of the mutual fund
market's total money market fund sales, and 14 percent of all stock and bond fund sales.
Financial institutions sell both shares in mutual funds managed by third party entities, and
shares in their own, in-house sponsored funds, known as proprietary funds. Approximately ISO
financial institutions currently offer over 1000 of these proprietary mutual funds. According
to one estimate, bank proprietary funds constitute one third of all bank and thrift mutual fund
sales and represent 10.7 percent of the overall mutual fund market, up from 8.4 percent of the
market in 1992.
I believe bank sales of mutual funds is a good thing for both banks and their customers,
but it is important that we establish rules to make sure customers understand that mutual funds
are not federally insured products. To that end, we will examine what the banks and the
regulators are doing to ensure such customer knowledge.
Two recent consumer surveys highlight these concerns. The first, sponsored by the
American Association of Retired Persons, the North American Securities Administrators
Association, and the Consumer Federation of America, indicated that 82 percent of financial
institution customers did not understand that mutual funds sold by financial institutions are not
federally-insured and that 52 percent of purchasers of mutual funds through financial institutions
believed that these products were insured by the Federal Deposit Insurance Corporation.
The second survey, sponsored by the SEC, indicated that 30 percent of financial
institution mutual fund customers believed that such funds were FDIC-insured.
I am sure we all agree that these numbers are unacceptable.
In addition to the consumer issues, we must ensure that banks and thrifts structure their
mutual fund operations so as not to create unacceptable risks to the institution or to the FDIC.
In short, the Subcommittee is holding this hearing to learn more about the involvement
of banks and thrifts in the sale of mutual funds and what efforts are being made by federal bank
regulators and the financial institution industry to ensure that bank customers are adequately
appraised of the risks involved with purchasing mutual funds, and that banks and thrifts structure
their mutual fund sales operations in a manner that protects the bank customer as well as the
federal deposit insurance funds.
We also will examine whether legislation is needed to address these concerns. In this
regard, I have asked the witnesses to provide their opinions on H.R. 3306, the Depository
Institution Retail Investment Sales and Disclosure Act, introduced by Chairman Gonzalez and
Mr. Schumer. We will also receive testimony from Representative Neal of Massachusetts, the
sponsor of H.R. 3389, the Depositor Institution Mutual Fund Sales Act.
We will first hear from our distinguished colleague Representative Richard Neal, a
former member of this Subcommittee.
We will next hear from the Honorable Andrew Hove, Jr., Acting Chairman of the
Federal Deposit Insurance Corporation; the Honorable John P. LaWare, Governor, Board of
Governors of the Federal Reserve System; the Honorable Eugene Ludwig, the Comptroller of
the Currency; and Mr. Jonathan L. Fiechter, Acting Director of the Office of Thrift Supervision.
Our third panel consists of Mr. R. Scott Jones, Chairman of the Board & Chief Executive
Officer, Goodhue County National Bank, Red Wing, Minnesota, and Member of the American
Bankers Association Board of Directors; Mr. John Shivers, Chairman/President & Chief
Executive Officer of Southwest Bank, Fort Worth.Texas, representing the Independent Bankers
Association of America; Mr. Ray Martin, Chairman & Chief Executive Officer, Coast Federal
Bank, Los Angeles, California, representing the Savings & Community Bankers of America;
Mr. Thomas P. Johnson, Chief Retail Banking Executive, Barnett Banks, Inc., Jacksonville,
Florida, and Chairman, Consumer Investments Committee, Consumer Bankers Association; and
Mr. Matthew P. Fink, President, Investment Company Institute, Washington, D.C.
Our final panel consists of Mr. Chris Lewis, Director of Banking and Housing Policy,
Consumer Federation of America; Mr. Philip Feigin, Securities Commissioner of Colorado, and
President-Elect of the North American Securities Administrators Association; Ms. Tess Canja,
Member of the Board of Directors of the American Association of Retired Persons; and Ms.
Diane Colasanto, President of Princeton Survey Research.
We have a lot to cover today so I would appreciate it if you could all summarize your
testimony. Your complete written statements will of course be made part of the record. I look
forward to hearing from all of you.
RICHARD E. NEAL
Second District Massachusetts
COMMITTEE ON WAYS AND MEANS
SUBCOMM'T-Efc ON TRADE
SUBCOMMITTEE ON SELECT REVENUE MEaS.AES
Congees of tfje tBniteb States.
%)ou&t of &eprcsrnta!ibes
38a*ljington, Q£ 20515
March 8, 1994
Mr. Chairman, first of all I would like to commend you for
holding this hearing on the sale of mutual funds. As banks
continue to increase their sale of mutual funds, this hearing is
very timely. An impressive group of witnesses have been gathered
to provide testimony on the regulation of the sales of mutual
funds. Hopefully, this hearing can shed light on a solution that
all of us can live with and a solution that will protect consumers.
In the last several months, banks have increased their sale of
mutual finds. For the first time in history, assets of mutual
funds have exceeded assets of deposits. With the continuation of
low interest rates, many consumers are turning to mutual funds for
a higher interest rate. More than one third of all banks are now
in the business of selling mutual funds.
As former member of this Subcommittee and the Committee on
Banking, Finance and Urban Affairs, I have learned that deposit
insurance is a confusing issue for may consumers. As we all know,
deposits in federally insured depository institutions are covered
for the first $100,000. This coverage is limited to certain types
of accounts and deposits in different accounts in the same
institution can be accumulated towards this amount. The concept is
simple enough, but many consumers are confused by the extent and
the scope of the coverage.
In the last few years, there have been several bank failures,
particularly in the New England area. I have heard from numerous
constituents who had more than $100,000 in their accounts. Several
of these constituents were not aware of the $100,000 limit. Others
were not aware that deposits in accounts in the same institution
were accumulated towards the $100,000 limit. This leads me to
believe many depositors are not clear on which types of deposits
are covered by federal deposit insurance.
I have been surprised by the number of consumers who believe
any type of investment instrument from a depository institution is
covered by federal depository institution. So many people walk
into a bank and see the Federal Deposit Insurance Corporation
(FDIC) seal in the window and feel their money is completely
131 Cannon house Office Building
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A few years back, this Subcommittee had a very intense debate
on deposit insurance. The issue was limiting the coverage.