VIEW FROM WASHINGTON / ROBERT ROSENBLATT : Federal Regulators Want Elderly Investors not to Bank on Mutual Funds

It’s a nightmare that haunts the dreams of federal regulators: Elderly people are streaming from their homes at Leisure World to the convenient branch of Lincoln Savings & Loan.

Inside, the friendly teller tells them about wonderful new investments as safe as a bank certificate of deposit: terrific securities issued by American Continental Corp., the parent company of Lincoln S&L--and; the flagship of financial mogul Charles Keating.

Of course, Lincoln collapsed amid bad investments and fraud, ACC went bankrupt and Keating was convicted and sent to jail for securities fraud.

What worries the regulators is that old people could be fooled again. The fear is not crooks like Keating. This time, they warn, legions of savers could meet disaster when they buy mutual funds at banks, only to see their holdings erode after a serious slump in the market.

The perpetrator of the new nightmare would be bankers, desperate for profitable new lines of business, who welcome the lucrative sales of mutual funds.

But what if they do a lousy job in explaining risks to their older customers, who may fail to understand that stock and bond markets can crash as well as soar?

Bank customers who live on fixed pensions, supplemented by interest earnings, have become desperate as CD yields have fallen to their lowest levels in decades. In the search for better returns, they could be taking a big risk that they don’t understand by purchasing mutual funds. “The real issue is, ‘What is good for consumers?’ ” said Eugene Ludwig, the Comptroller of the Currency, in charge of regulating national banks.

Normally, his staff worries about safety and soundness--whether banks are making good loans to responsible borrowers.

Mutual funds are different. They don’t pose safety and soundness issues for the bank. Intead, the risk of loss is faced by the customers--the same people who are used to buying CDs, which are guaranteed by the U.S. government for up to $100,000.

About a third of the nation’s 11,000 banks are now peddling mutual funds, and they sold a whopping $409 billion in the first half of last year.

Banks offer a vast selection, marketing more than 1,200 different mutual funds, running the gamut of money market, stock and bond funds. It’s a profitable business--and, significantly, a growth business at a time when banks are suffering a steady erosion of their importance in the nation’s financial system.

Banks already have lost many of the biggest corporate borrowers to the world of commercial paper. Some of the same corporate giants now have their own financing arms that make leases, issue home mortgages and offer capital to growing small businesses. Tough competitors are taking away big chunks of bank business.

When a rare new opportunity to make money by selling mutuals funds presented itself, the banking industry stampeded into the marketplace.

Now, the regulators are wary. They want to make sure that banks don’t use hard-sell tactics that could confuse customers who believe their money is safe at the bank.

Wells Fargo prepared a blunt disclosure form, and Ludwig liked it so much he made thousands of copies--without the Wells Fargo name--and shipped them to bankers who asked for advice on how to talk to their customers about the new investments.

The Wells Fargo statement, handed to every customer who asks about mutual funds, says in big type:

If that isn’t enough, the paper includes a circle containing the words “FDIC insured” with a bold line slashed through them. It looks like those graphic “no-smoking” signs, where the line cuts through a cigarette.

If this kind of blunt warning discourages customers from dabbling in the stock market through bank mutual funds, it’s tough luck, according to Ludwig.

“To the extent this kills fund sales at banks, that’s too bad,” he said in a recent interview. If full disclosure of risks means some banks lose some fund sales, “it just has to be that way.”

He wants bank sales personnel trained to recognize that a fund dealing in options might be suitable for a young professional couple but should be off-limits to a 75-year-old widow.

“I want to see real disclosure. I want people to know through oral and written statements that these products are risky, and some are quite risky,” Ludwig insisted.

The Wells Fargo disclosure is very different from the approach of NationsBank, which is selling fundsthrough a partnership with Dean Witter.

A NationsBank brochure is headed, “Invest in Tomorrow Where You Bank Today,” and shows a branch office under a beautiful purple evening sky. Inside, the headline reads, “The Investment Firm You Can Bank On.”

The text proclaims: “No matter what your future plans, from sending your kids to college to retiring early, we can help. Your investment officers will help you design an investment portfolio to accomplish your goals, and will then put your plans into action.”

The only disclosure comes in tiny italic type on the back page of the brochure. It says investment products “are not obligations of, guaranteed by or endorsed by NationsBank . . . ,” and also says the products “involve investment risk, including possible loss of principal.”

Katy Pike, a spokeswoman for NationsBank, said: “We’ve always been committed to full disclosure, to informing our customers and our investors that these are not guaranteed products. We have long followed guidelines by the Office of Comptroller of the Currency and have never had any problem.”

But the NationsBank brochure’s type is small enough to guarantee squinting by just about everyone over the age of 40 who reads the brochure.

And what happens when the stock market slumps bringing down the financial security of credulous NationsBank customers? Will the bank ask, Why didn’t you wear glasses to read our sales pitch?

Securities and Insurance Products:

are NOT FDIC INSURED

are NOT obligations of Wells Fargo Bank

are NOT guaranteed by the bank and involve investment risks including possible loss of principal.