Many banks and thrifts, hard-pressed by high-yielding money market mutual funds, scrape together the most competitive products they can muster and then swagger about town, talking tough.
''Bad news for money market funds,'' snarls one S&L advertisement. ''We make money market funds obsolete,'' claims another.
Bank and thrift officials say the promotions are just hard-nosed competition. But the money fund industry claims many of the ads seriously mislead potential investors. And the plight of some investors in a failed Iowa bank and trust lends credence to the money funds' charges.
In late July the Investment Company Institute (ICI), a mutual fund trade group, sent a letter to Securities and Exchange Commisson chairman John Shad, calling on the SEC to invoke its antifraud powers and investigate alleged depository institution advertising abuses in the areas of retail repurchase agreements (familiarly known as ''retail repos'') and the misrepresentation of certain investments as ''money funds.''
Repos are, in effect, loans consumers make to depository institutions, secured by a pool of federal securities. The bank or S&L promises to pay back the loan in a short time, at a premium that represents the interest earned.
When retail repos are automatically renewed, they seem very much like a money market fund - but there are some crucial differences. Investors in money funds own a share of investment company assets. Investors in retail repos don't have first claim on the government securities backing their investment unless the securities are clearly separated from the institution's other assets - a technical process known as ''perfecting'' an investor's interest.
If a retail repo isn't ''perfected'' and the bank or S&L fails, investors face the prospect of becoming unsecured general creditors. Yet many institutions advertise their retail repos as ''backed by government securities,'' implying a degree of safety that might not be present, complains the ICI.
''People have put $18 billion in those things,'' Mr. Fink complains, ICI chief counsel. ''They don't know what they're getting.''
Applicable government safeguards mean ''the interest of repo investors is well-secured,'' replies Brian Smith, a research official with the US League of Savings Associations.
Most federal regulatory agencies strongly suggest ''perfecting'' for most types of depository institutions, say government officials. For savings and loans, perfection is required by the Federal Home Loan Bank Board. But retail repos are relatively new investments, and law in this area is still unclear. Some institutions - inadvertently or otherwise - may not have covered their retail repo investors.
Those who bought retail repos from the Mount Pleasant (Iowa) Bank & Trust, which failed last month, are finding out just how complex this area is. The Federal Deposit Insurance Corporation will reportedly tell Iowa courts that Mount Pleasant's $450,000 in repos was not adequately secured. Those who bought the instruments face the prospect of never recovering all their investment.
The Investment Company Institute also gets steamed up by depository institutions that use variations on the phrase ''money fund'' to advertise retail repos; short-term certificates of deposit; and hybrid investments blending repos, CDs, and checking accounts.
One Ohio S&L calls its repos ''Freedom Funds;'' another has named them ''Daily Money Funds.''
''They're trading on the popularity of real money funds,'' charges Matthew Fink of ICI.
''Funds'' are investment companies, says Mr. Fink, a line of business proscribed to banks and thrifts under federal law.
Depository institution officials retort that mutual funds are just worried about competition. Recent court and regulatory decisions have moved thrifts and banks closer than ever to the securities business, they say, and money funds are just trying to protect their territory.