WASHINGTON -- The Federal Deposit Insurance Corp. announced yesterday that it had hired a company to make anonymous calls and visits to banks and savings institutions in an effort to determine whether they are adequately disclosing to customers that mutual fund investments are not federally insured.
Employees of Market Trends Inc., a market research company based in Bellevue, Wash., will pose as customers in calling or visiting 3,000 to 4,000 branches of banks and savings institutions around the country, said Alan J. Whitney, a spokesman for the agency.
FDIC Chairwoman Ricki Tigert said the goal of the seven-month survey was to determine whether any new rules were needed to protect consumers. But she added that if the survey found that an institution was not providing adequate disclosure, the FDIC would conduct a formal investigation or pass the information to the appropriate federal regulator.
Federal regulators have the legal authority to impose fines or even ban a bank or savings institution from selling mutual funds. But in practice, regulators usually tell executives to change their practices immediately.
Yesterday's move is likely to touch off controversy because the banking industry, the Securities and Exchange Commission and the Federal Reserve have all opposed the use of anonymous testers for the enforcement of a regulation, rather than the enforcement of criminal laws.
The SEC has led these objections, contending that such programs could constitute entrapment and that the federal government should not be paying people to lie about their identities except in undercover work such as investigating drug cartels.
The Fed has raised the same concern on the ground that banks may be less likely to confide in federal regulators who show little trust in them.
The Office of the Comptroller of the Currency, which regulates nationally chartered banks and is a semi-independent unit of the Treasury Department, proposed last spring that all federal regulators use the anonymous testers, or investigators, to measure the adequacy of bank disclosure standards.
But when the SEC and the Fed resisted the original proposal, the office quietly abandoned the idea in favor of action by the FDIC, which regulates virtually all of the nation's banks and savings institutions.
Rep. Marge Roukema, who is expected to be the next chairwoman of the House Banking Committee's panel on financial institutions, said in an interview yesterday that each of the agencies should publicly state their positions on anonymous testers.
"We better be very careful with this, and we better certainly listen to the credible voice of the Fed," the New Jersey Republican said. "I'd like to hear what they have to say about this because it's rather daring."
Andrew C. Hove Jr., vice chairman of the FDIC, told the House panel March 8 that the agency planned to test banks, though he did not go out of his way to say the test would be anonymous.
Federal insurance covers savings and checking deposits at banks and savings institutions for up to $100,000 per account. The FDIC will be looking at sales practices for uninsured accounts, mainly in mutual funds but also involving stocks and other potentially volatile investments.
An SEC survey a year ago of 1,000 households found that 66 percent believed erroneously that money market mutual funds sold through banks were federally insured, while 28 percent believed inaccurately that all mutual funds sold through banks were federally insured.
But the Consumer Bankers Association, a trade group based in Arlington, Va., issued its own survey on Monday, finding that only 5 percent of bank mutual fund customers believed that the funds were federally insured.
Joe Belew, the association's president, expressed misgivings yesterday about the FDIC's plan. "We're not very sure it's accurate or fair," he said. "There's an entrapment risk."
At a lunch with reporters yesterday, Ms. Tigert played down concerns that the anonymous testers might entrap bank officials into failing to disclose risks. "These are professionally trained individuals who will ask about investment opportunities," she said.
Banks sold virtually no mutual funds until the mid-1980s, when a combination of deregulation and competition from brokerage firms and other financial service companies prompted them to diversify.
According to the Investment Company Institute, the mutual fund industry's trade group, banks handled 14 percent of all new investments in stock and bond mutual funds last year.
Federal law enforcement agencies tend to wait until after an undercover operation has been completed before announcing its existence. FDIC officials defended their announcement yesterday, saying that it would provide an incentive for financial institutions across the country to improve their disclosure practices.
"It may well have a salutary effect even on those institutions that are not visited," Mr. Whitney said.